This document describes what the reorder point (ROP) and the safety stock (SST) are and what service methods can be used when calculating ROP and SST. For information about how to calculate these values, see About working with inventory calculations.
The following sections are included:
ROP and SST
Reorder point (ROP) represents the stock level at which it is time to place a purchase order or an internal replenishment order. When running the Create purchase suggestions program or the Create internal replenishment suggestions program, the available stock level is compared with the calculated ROP, and if the available stock level has fallen below the ROP, it is time to reorder.
The ROP contains two components. One is an estimate of how many units you will sell during the time spanning from when you place an order to restock supply until we receive the goods from the supplier. This is the forecasted replenishment time demand. The previously calculated forecast is used to estimate this component.
Due to uncertainty in estimating the replenishment time demand, an extra buffer is added to the estimated replenishment time demand as the second component of the ROP. This second component is called the safety stock (SST). SST is there to protect you from a stock out if the real demand during the replenishment time is greater than the forecasted replenishment demand.
The service calculation is aimed at calculating ROP and SST based on a desired level of customer service. The service methods available in DC1 Inventory Control are:
- Service based
- Demand based
These methods are described in section Service methods. For information concerning the actual formulas that are used, see Inventory control formulas.
ROP and SST storage
The calculated ROP and SST are stored per item/warehouse record in the Item file. They are calculated when the Inventory calculations program is run.
ROP and SST manual override
A manual override ROP and SST can be established in the Item file by entering the desired override value in Manual ROP and Manual SST on the Inventory management panel. If you enter a value in either of these fields, it is used in all places in the system where ROP and/or SST are needed. You also specify how long the manual override is to be used by entering an end date in End override date below the appropriate override field. You can enter the value 999999 in End override date to indicate that the override is to continue indefinitely.
The calculated ROP and SST are still updated in the system, but are not used as long as the manual override applies.
ROP and SST error calculations
By entering a percentage in Maximum ROP dev in Work with service control codes, you activate an error test for the ROP calculation.
The system then checks the previous periods ROP against the present period ROP. If the difference between the two exceeds the maximum deviation percentage, a report line is printed on the Inventory calculation error control report and ROP error in the Item/Warehouse file is set to YES. If there is no error, this field will be set to NO.
Note: If no maximum deviation is entered in the Maximum deviation field, the system cannot run an error test.
Safety stock works exactly the same way by entering a percentage in Maximum SST dev in Work with service control codes.
Service methods
The following service methods can be used in the calculation of ROP and SST:
Service based
This is the theoretical method that is used to calculate a statistical safety stock. It takes into account such factors as your service level, forecast uncertainty and lead time. The safety stock is based on the service level established in Work with service control codes (at item/warehouse level), the length of the replenishment time, the size of the forecast error and the size of EOQ.
It will be high if you have long lead times, high uncertainty in your forecast, and high requested service level. It will be low if EOQ is high because a high EOQ means that you will maintain a high stock level. In this case, high EOQ acts as the buffer against unexpected demand that the safety stock would normally provide.
Demand based
This is a simplistic rule of thumb method to set your safety stock. It is calculated as a specified percentage of the forecasted demand during lead time. It provides a simple way of calculating the safety stock.
ROP and SST time factor
The ROP/SST is calculated in the Start inventory calculations program, at the beginning of each new forecast period. The first component in the ROP is the forecasted demand during the replenishment time. It is retrieved from the Forecast file, starting at the present date and adding up the forecasted demand for the number of days of the replenishment time.
If you recalculate ROP/SST at a later time in the same forecast period, you can get a different forecasted demand because the number of days replenishment time can span over two forecast periods.
For this reason, the forecasted demand is always calculated from the first day of the present forecast period, meaning that the retrieved forecast is the same no matter when you calculate the ROP/SST in a given forecast period. That is, ROP/SST in the Item file is really an estimate of the true ROP/SST.
When you run the Create purchase suggestions program, ROP/SST is recalculated using the present date as the start date to use for replenishment time to get an accurate ROP/SST. Therefore, you can get a different ROP/SST on the purchase suggestion line than the one in the Item file.
Service method guidelines
Listed below are a few guidelines to help you decide which service method is the best:
- The Service based method is the theoretically correct method to use when you want to set the safety stock to give you a specified service level. The service level is defined as the probability of always being able to give a customer what and when the customer wants it, directly from stock.
- The Service based method is most efficient when there are high demand levels. The reliability of this method decreases if demand is not smooth and/or demand is low.
- The Demand based method is easy to use and understand.
- For important, fast moving items you may want to use the Service based method, but for a large part of your stock it could be useful to employ the Demand based method.