- Reorder points have a poor reputation and they are underused, but they are appropriate under certain circumstances.
- It is critical to understand how reorder point contrasts with MRP or a non-forecast based planning versus forecast based planning.
Introduction: MRP and Reorder Points
MRP is a forecast based planning method. Reorder point is a non-forecast or consumption based planning method. You will learn the comparison on and contrast MRP versus reorder point planning.
What is ROP Inventory?
Our ROP definition will cover what reorder points do.
A reorder point is very simply a quantity of stock or an interval at which a “reorder,” or order is to be created. In reorder point planning, orders are not triggered by a specific requirement (such as a forecast or dependent requirement), but instead by the depletion of stock over time, eventually triggering the minimum stock level or reorder point. Reorder points can be used with any of the supply planning methods, or they can be used to exclusively control the supply plan without any of the methods. However, when it is used exclusively to control the supply plan, the company is said to be performing reorder point planning, as opposed to forecast-based planning. MRP/DRP and APS (heuristic, allocation, cost optimization, inventory optimization) methods are forecast-based planning.
A ROP definition can be derived from reviewing a ROP formula. Our interactive calculator is available at this article.
Why Reorder Points Have a Poor Reputation
Reorder points frequently are criticized for not providing foresight. However, many of the arguments used against reorder point planning don’t hold up under scrutiny when one considers products with certain demand history characteristics (I provide this scrutiny to specific anti-reorder point planning quotations taken from other books). Having worked in, and implemented, every supply planning method that is available in software: reorder points have their place, and many of the critics of reorder point planning have unfounded reasons for resisting them.
This following quotation will use the term “requirements planning.” To most readers, it will not be apparent what this is.
- “Requirements planning is the process of taking the forecast and exploding the bill of materials — which then drives orders.”
This quotation which will be discussed in this article is from 1967. This is before MRP became a commonly implemented application.
Before MRP software existed, some people in companies calculated requirements this way. They did this primarily by doing the math with calculators and using a table. This logic of requirements planning was then migrated to software.
When to Use Reorder Point Planning
Items placed on a reorder point methodology could be placed there for the following reasons. • Forecastability: They are difficult or impossible to forecast… or they have a level forecast because their demand history is so stable. • Lead Times: Their supply is relatively unconstrained and their lead times are short. Any products in these categories are essentially either not worth the effort to plan with more advanced methods, or advanced methods do not add value to their planning over the simpler method of reorder point planning. This does not seem to be a very well understood point by those that work in MRP/procedural planning. As is pointed out by E. A. Silver in his well-regarded paper on ideas related to inventory control for items with erratic demand patterns:
“Most useable inventory control procedures are based upon assumptions about the demand distribution (e.g., unit sized transactions or normally distributed demand in a replenishment lead-time) that are invalid in the case of an erratic item. If this is not the case, the procedures tend to be computationally intractable.”
This paper was written back in 1970. However, an enormous increase in computational power since that time has not made the problem more “tractable.” Although often overlooked, all supply planning methods are designed to be used with products that can be forecasted within a certain accuracy range.
When the Forecast Accuracy is Simply Too Low
If the forecast accuracy is too low, the procedural methods of supply and production planning is undermined. If the forecast accuracy is extremely high, then reorder point planning can provide results of equal quality, but with much less effort. Procedural planning is the best fit for product location combinations with accuracy levels that are neither too low nor too high. Paradoxically, the understanding of where value can be added by supply planning procedures is different than this, with the concept being that the worse the forecast accuracy, the more a sophisticated planning system can add value.
There is a strong orientation within companies to create forecasts for all items in the product database. However, this does not necessarily mean that the forecast should actually be used for every product location combination in the supply planning system where a forecast is created in the demand planning system. However, for most companies at least, some portion of the product database cannot be reliably forecasted. Thus, forecasts are emphasized by demand planning for some product location combinations that add no value to the supply planning process.
Improving Problematic Demand History with Complex Forecasting?
Specifically, not all product location combinations can have their forecast improved by a more complex forecasting method (which is the continual hope of many) than a simple long-horizon moving average resulting in a level forecast. This applies equally to very stable products, as they also will use a level forecast. Reorder point planning for the finished good (as the associated finished and raw material supply plan is driven from the finished good supply plan) is an effective and low effort/low cost approach for product location combinations that fall into this category.
Reorder Point Planning for Deployment/Outbound Supply Planning
Up until this point, we have discussed reorder point planning for the initial supply plan, which generates the purchase requisitions and the planned production orders. However, replenishment/reorder parameters are available at all the locations in a supply network. Therefore, there is nothing to say that reorder point planning cannot be used throughout the entire supply network, both inbound to the plant or regional distribution center and outbound for deployment.
In this way, reorder point planning can be used for deployment, which would simply mean removing them from the product location combinations from the planning procedure that is used. With most supply planning applications that I have used, this is simple to do.
The business should be given the task of re-determining the reorder point parameters for the product locations that are to be transitioned off the active planning track. If they are new to doing this, they may need some outside help from someone with a strong mathematical understanding of how to create intelligent reorder points.
ROP Inventory Calculator
The reorder point calculator we have embedded into our website uses the following values.
- Average Lead Time Estimate as a Percentage of a Month
- Average Monthly Demand
- Economic Order Quantity
- Desired Service Level – Case Fill Rate
- Historical Forecast Error
Thus, a ROP definition would include that a reorder point needs to account for variability, the order size, the lead time and a service level. A ROP definition would explain that the reorder point is the trigger when a new order is generated.
ROP inventory is the inventory that is associated with the reorder point. Therefore the ROP inventory will be that portion of stock that is based on using the ROP. If we look at Lean principles, they often assume more frequent ordering.
Therefore, under Lean, the reorder point will tend to be higher. Thus, the ROP inventory can be considered the portion of inventory that is carried for setting a particular reorder point. The term ROP inventory is very infrequently used within companies.
Developments in Supply Planning after MRP
While many more sophisticated methods of planning have arisen since MRP.
This is of course very different than reorder point planning — where the reorder point determines the reorder date and reorder quantity. Reorder point planning is called consumption based planning because inventory is consumed until a trigger — the reorder point is hit — and then the order is generated.
“This type of simple “requirements planning” technique has been used for many years. While its users often feel that it is superior to an order point system for ordering components (that is not the finished good or the raw material by the intermediate product), its use often results in excess inventory unless it is refined substantially. The explosion of the sheet (the BOM) can only show the total quantity required over a period of time, and this period must be long enough to cover the longest manufacturing or purchasing lead time of any component. Many companies do their planning on a quarterly basis, and must plan more than one quarter ahead, showing “firm requirements,” for the following quarter. This is necessary because any component requiring more than a week or two of manufacture could well be in short supply at the beginning of the next quarter if not planned for.
Further problems occur because the planning period is so long. Planning “firm requirements” for a thirteen week period requires a forecast of anticipated requirements for each end item; the farther out into the future this forecast is extended, the less accurate it will become.” – Production and Inventory Control: Principles and Techniques
Issues with This Quotation
The first part of the quotation is interesting because it points out the issue of the planning horizon. In this case, it is a horizon as calculated on paper. This is not a problem now as planning horizons can be extended with the computer performing the calculations automatically.
However, the second paragraph is still a problem. It is mitigated by the fact that the forecast can be changed up until the lead time. In the past before computers, re-computation was not so simple, the author’s point is that performing the calculations before necessary would result in a less accurate plan.
When Requirements are Firmed with ROP Inventory Decisions
Mainly the requirements should not be made firm until before the lead time of the components as it makes sense to maintain flexibility up until an order must be created. After this point, no forecast changes should be accepted or even discussed because the time for forecasting has passed.
Reorder Points Versus MRP or Forecast Based Planning
When a reasonably accurate forecast can be generated, MRP has advantages over reorder point planning. However when this is not the case, and with growing product proliferation and the overall decreasing level of forecastability of most product databases that companies maintain, the reorder point is the most efficient method of performing supply planning.
This can be determined by using forecastability to segment the product location database so that some of the product location databases can go out on MRP or other forecast based supply planning methods, while the other part of the database can go out or be assigned reorder points.
It is interesting to think at one time that the planning horizon was calculated entirely with a table and a calculator. This lack of both a perpetual inventory system and permanent way of updating the forecast made the timing of the calculation quite important. Now all calculations are instantly performed whenever a change is made.
The overall question of MRP versus reorder point mainly comes down to the ability to provide a forecast that is of low enough accuracy that there is a benefit to using MRP.
Reorder point planning is an early approach to supply chain planning; however, while often dismissed as passé, it actually has applicability in a number of circumstances. Reorder point planning can be used effectively for products that are both easy and difficult to forecast. What works well for products with erratic demand history works equally well for products with extremely stable demand history. It is a relatively simple matter in a supply planning system to convert some product location combinations to pure reorder point planning and other product location combinations to being processed with a supply planning method. Furthermore, a product may be planned in one way at one location and planned a second way at a different location. In fact, customizing the supply planning approach per the demand history at a product location rather than applying a blanket approach to all products will produce superior results.
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Brightwork MRP & S&OP Explorer for Order Optimization
Order Sizing and Optimization
Order optimization is necessary in order to get the predicted value from ERP and other supply planning applications. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:
Plossl, George W. Production and Inventory Control: Principles and Techniques, Second Edition. Prentice Hall, 1985.
About ROP Inventory
Harris. Ford W. How Many Parts to Make at Once. Factory, The Magazine of Management. 1913.
I cover reorder points in the following book.
Lean and Reorder Point Planning Book
A Lost Art of Reorder Point Setting?
Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?
Implementing Lean in Software
All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.
Are Reorder Points Too Simple?
Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.
There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.
Rather than “picking a side,” this book shows the advantages and disadvantages of each.
- Understand the Lean Versus the MRP debate.
- How Lean relates to reordering points.
- Understand when to use reorder points.
- When to use reorder points versus MRP.
- The relationship between forecastability and reorder points.
- How to mix Lean/re-order points and MRP to more efficiently perform supply planning.
- Chapter 1: Introduction
- Chapter 2: The Lean versus MRP Debate.
- Chapter 3: Where Supply Planning Fits Within The Supply Plan
- Chapter 4: Reorder Point Planning
- Chapter 5: Lean Planning.
- Chapter 6: Where Lean and Reorder Points are Applicable
- Chapter 7: Determining When to use Lean Versus MRP
- Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning