How to Best Understand Reorder Point Versus MRP

Executive Summary

  • 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

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.

Conclusion

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.

How Much Do You Know About Reorder Points?

Reorder Point Quiz

This quiz asks fundamental questions about reorder points.

Remote Supply Planning Consulting

  • Questions About This Area?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

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:

References

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


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

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.

Chapters

  • 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

Software Ratings: Supply Planning

Software Ratings

Brightwork Research & Analysis offers the following free supply planning software analysis and ratings. See by clicking the image below:

software_ratings

How to Segment the Supply Chain Product Location Database

Executive Summary

  • The Concept of Coding a Product Location Database.
  • The Forecast-ability of the Product Location Combination.
  • The Forecast Model Used.
  • The Master Data Review Cycle

Acronyms

PLC – Product Location Combination

The Concept of Coding a Product Location Database

Companies tend not properly to code their product location database. This is important to do so that different product locations can be treated appropriately by the system.

This coding can be valuable so that a short code can tell anyone who works with the product location combination (PLC) the following

  • The fundamental properties of the PLC.
  • How the PLC is setup in the system.

This coding is not static. The PLC is periodically reviewed, or reviewed based on market intelligence. If the coding is kept up to date, it can be useful for a number supply chain planning for purposes.

Forecast-ability of the Product Location Combination

One of the first places to start is with the forecast-ability of the PLC. Forecast-ability is a measure of how predictive the selected forecast model is. This is often presented within forecast systems as the fitted R-Square. Applications can sometimes provide the fitted R-Square for not only the individual PLC.

They can also do this for the complete product database — or a weighed PLC value. Variability factors can be used to determine the forecast-ability of a PLC with a formula as is explained in this article.
Forecast Error Assignment A PLC can then be coded for whether it is forecast-able. If it is forecast-able, this leads to another set of questions, and if it is not forecast-able, this leads to a different set of questions. To help people follow this conditional logic, it is programmed in the calculation form below. Try switching the first drop down between forecast-able and unforecast-able to see how the rest of the calculation form changes. 

Forecast Model Used

For the PLCs that are not assigned a level forecast, the forecast model that is assigned should be part of the PLC coding. In the calculation form below,  this selection is available.

Master Data Review Cycle

As explained earlier, the PLCs must be reviewed and updated on a periodic cycle. PLCs differ with their review. Before computers were available, PLCs were placed on a review cycle. This review cycle was for actually calculating order quantities.

A review cycle might look something like this:

  • Products 11234 to 11500 – 2nd Monday of the Month
  • Products 11500 to 1534 – 2nd Tuesday of the Month

Computers did not compute the order quantities; this was something that had to be performed my inventory analysts. When computers did arrive, software vendors began touting their “perpetual inventory” abilities.

This meant that when a goods receipt was recorded, the inventory was immediately recalculated.

  • This also allowed companies to carry less inventory. Before computers, safety stock had to cover not only variability in lead time and forecasts but also the longer period between reviews. In a computerized system, if a larger than forecasted order comes in, it may reduce the planned stock below the reorder point. The instantaneous calculation will cause a new order to be generated.
  • In a manual periodic review system, that product may need to wait until it was recalculated by an inventory analyst. That is unless the analysts reviewed the large orders and then recalculated just those PLCs ahead of the rest of the PLCs in their rotation.

The book Decision Systems for Inventory Management and Production Planning proposes an advantage to periodic review and periodic ordering.

“Items may be produced on the same piece of equipment, purchased from the same supplier, or shipped in the same transportation mode. In any of these situations coordination of replenishment may be attractive. In such a case periodic review is particularly appealing in that all items in a coordinated group can be given the same review interval. In contrast, under continuous review a replenishment decision can be made at practically any moment in time, hence the load is less predictable. A rhythmic, rather than random pattern is usually more appealing to the staff.”

This master data review cycle concept is the same concept as was applied previously to inventory management. Of course, a lot less work because this review cycle is for setting master data — and prevents the settings from falling out of date.

This is also important because master data is often changed in reaction to short-term needs. But is is often not changed back.

Supply Planning Method Used

The book Multi-Method Supply Planning in SAP APO lays out how different methods can be used for different PLCs. In most cases, this is applied by planning some PLCs in the ERP system and some in the advanced planning system — or APS. However, this is not the only alternative available.

If a PLC is forecastable, uses the seasonal method and has a four-month review cycle, and if it is planned by a heuristic then its PLC coding would be FS4H. This coding system can be added as a custom field onto the material master or product master so that any person reviewing the PLC can determine quickly how it is managed.

The coding can also be applied to the overall PLC spreadsheet, that is used to analyze PLCs outside of the system.

Remote Supply Planning Consulting

  • Questions About This Area?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

Brightwork MRP & S&OP Explorer for Tuning

Tuning ERP and External Planning Systems with Brightwork Explorer

MRP and supply planning systems require tuning in order to get the most out of them. Brightwork MRP & S&OP Explorer provides this tuning, which is free to use in the beginning. See by clicking the image below:

References

Multi Method Planning Book

MULTI

Multi-Method Supply Planning in SAP APO

Choosing Supply Planning Methods

Which supply planning method meets your company’s business requirements?

The answer might surprise you! Here’s the truth: There is no one right supply planning method for all situations, even within one company! In fact, it is unnecessary to choose only one method, and using multiple supply planning methods is feasible and in most cases, has many advantages over using a single method.

Multi-Method Uses

This book explains why no one supply planning process meets all requirements and lists the many benefits of using multiple supply planning methods. This book gives practical advice about selecting supply planning methods and method modifiers, and goes deep into the “how to” of implementing mixed methods, and how specifically to setup them up in SAP APO, which are approaches taken from real projects. The book is also useful as a general document on how multi-methods can be used in supply planning applications.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Different Supply Planning Methods Available within SAP SNP
  • Chapter 3: Combining Supply Planning Methods Across External Systems and ERP Systems
  • Chapter 4: Preparing for the Prototype for Multi-Method Testing
  • Chapter 5: Prototyping the Multi-Method Supply Planning Model
  • Chapter 6: Coding the Product-Location Database /Spreadsheet
  • Chapter 7: Planning Beyond a Single Supply Planning Method Per Echelon
  • Chapter 8: Creating a Dynamic Master Data Selection for Automatic Product Location Switching Between Methods
  • Chapter 9: Overcoming the Human and Information Challenges of the Multi-Method Approach
  • Chapter 10: Combining SNP with Inventory Optimization and Multi-Echelon Planning
  • Chapter 11: Conclusion

https://en.wikipedia.org/wiki/Perpetual_inventory

Silver, Edward. Peterson, Rein. Decision Systems for Inventory Management and Production Planning, Second Edition. John Wiley & Sons. 1985.

How to Best Calculate Reorder Points

Executive Summary

  • This is an introduction to reorder points and how to use the reorder level vs the reorder quantity.
  • The Brightwork ROP calculator sets a dynamic reorder point.

Introduction to Reorder Points

As discussed in this article, reorder level and reorder quantity are both significantly underused in companies and can be set some ways in systems like SAP SNP. You will learn about reorder points and how they are set in production systems.

The Significant of Reorder Points

Reorder level and reorder quantity planning is significantly underestimated. This is because companies so frequently overestimate their ability to effective forecast. Most companies don’t have the capacity to leverage even basic forecasting functionality which is available. This functionality has been available within forecasting applications for years.

Reorder level and reorder quantity work well for both highly forecastable products and products that are difficult to forecast. Any product which received a level forecast assignment using a best fit procedure can have their supply planning emulated by using a reorder point.

By placing a substantial portion of the company’s product database on reordering level and reorder quantity there are several benefits.

  • It saves time.
  • It allows the company to focus on those products that can be improved through forecasting.

The graphic below explains this.

Forecast Error Assignment

Order Point Versus Reorder Point

The term order point is infrequently used. People most often use the term reorder point rather than order point. However, order point and reorder point are the same thing. An order point is a level of inventory where an order is generated. Rather than an order point, a reorder point simply implies that the ordering is perpetual.

The Uses of Dynamic Reorder Level and Reorder Quantity

The beautiful thing about the dynamically reorder point calculation is that it adjusts across the following dimensions:

  • Service level
  • Lead time and forecast error both in variability (for lead time and forecast error) as well as lead time duration.

Dynamic Reorder point analysis can be used for an SKU or any aggregation level. For instance, this form can be used to model the inventory and supply chain of an entire company. Instead of entering the values for a single SKU, the overall or average values can be used.

This allows one to see the relationships between things like service level and the total amount of stock carried. This can also be used to create a service level to inventory curve. An inventory service curve is something which many companies do not have.

It will not, of course, include the total stocking level. So the total stocking level should be estimated and added. Only the reorder point should flex — while the cycle stock should stay the same.

Using Dynamic Reorder Level and Reorder Quantity in Production Systems

As is discussed in this article, reorder points can be set some ways in systems like SAP SNP, ToolsGroup or Demand Works Smoothie.

Most importantly, they can set to work without a forecast or with a forecast.

One of the of the confusing things about setting up a reorder level and reorder quantity is what to do with the forecast that has been generated for the products that are moved to reorder level and reorder quantity or reorder point. A prediction is still required for things like budgeting. It still makes sense to generate a forecast for them. Another reason for this is that products that are set on reorder point — don’t necessarily stay on reorder point in the future — and vice versa.

The demand history will tell the company when a product should be moved to reorder point planning. It will also tell the company when a product should be moved away from reordering point planning. That is when it is to become an actively forecasting item.

What Makes This Reorder Point Calculator Unique

Most of the reorder point calculators that online calculate a static reorder point typically based upon just lead time, safety stock, stock, and sales. There is no measure of variability in either lead times or the forecast, and it asks the user to input the safety stock as well as the stock. However, variability dramatically changes the safety stock – which is part of the reorder point calculation. Most of these online calculators are not helpful to people need to see the relationships between multiple factors and who don’t have the stock information and require estimates.

The authors seem to have put in the absolute minimum level of work so that they could say their website has a safety stock calculator.

This calculator below does not ask for existing stock or safety stock but does ask for variability. If the variability is not known, then zero standard deviations can be added to the form — to mostly hold those values static.

ROP Formula, or Reorder Point Formula

  • An ROP formula or reorder point formula are all synonyms for the same thing.
  • A ROP formula or reorder point formula are all used to determine the reorder point.
  • The reorder quantity formula shows the amount to be ordered once the reorder point is reached. A reorder quantity formula is often called an economic order quantity.

How the Calculation Form Works

This reorders point calculator provides the intermediate values, along with explanations so that the overall logic of the dynamically reorder point calculator can be fully understood by both students and practitioners.

This form requires input to provide output. However, it also has default values. You can change any input value and the rest of the formula — the output will change immediately. You can continue making changes, and the form will always update without having to press any button or refresh.

Note: For some reason, the drop down field below does not appear to work in Firefox – so if you are using that browser try a different one. Second, when you enter a decimal into the Standard Deviation of Demand and Standard Deviation of Lead Time, you may receive a message “Please enter only digits.” You can ignore that message. The calculator works fine with a decimal point.

To determine the EOQ, see the EOQ calculator see this link.

Remote Supply Planning Consulting

  • Questions About This Area?

    The software space is controlled by vendors, consulting firms and IT analysts who often provide self-serving and incorrect advice at the top rates.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

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:

References

Lean and Reorder Point Planning Book


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

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.

Chapters

  • 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