- The question of when to use reorder point planning relates to several important factors.
- We cover when to use reorder points versus forecast based planning.
The question of when to use reorder point planning used is critical to determine when to use a non-forecast based method of supply planning (reorder points) and forecast based planning (like MRP).
See our references for this article and related articles at this link.
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 process 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 particular accuracy range.
If the forecast accuracy is too low, the procedural methods of supply and production planning are undermined. If the forecast accuracy is too 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 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.
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 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.
Reorder point planning is an early approach to supply chain planning; however, while often dismissed as passé, it has applicability in some 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.
We developed an approach where reorder points are calculated externally. Which allows for a higher degree of control and for the average inventory to be coestimated in a way that provides an observable total system inventory, holding cost, service level, and a picture of what is happening to the overall system. Calculating individual parameters like reorder points without an appreciation for the systemwide does not make any sense.