ERP Planning Tip #2: Get Quantity and Lead Time Right

Though obvious to many, it’s important to mention that a planning engine generates supply recommendations relating to both existing orders and new orders.

For existing orders, a planning engine can suggest how companies should treat late orders and early orders. For example, it can recommend that orders be cut-back, cancelled, delayed, re-routed or supplemented. For new orders, it can recommend purchase order timing, quantities and supply sources (among other things).

However, for any of these recommendations to be meaningful and actionable, they need to be based on relevant, timely and accurate item-based data. Item-based data sources include: a) order modifiers, b) bills of material and routing structures, and c) inventory levels.

In this tip, we take a closer look at the first of these item-based data sources: order modifiers. In essence, order modifiers define the order parameters (or rules) relating to:

  • Order quantity; and
  • Order lead times

Order Quantities Modifiers

Order quantity modifiers establish replenishment parameters. For example, a planning department can set rules that require items to be replenished in multiples of 10, in batches of six, or up to 1000 at any one given time. Modifiers can also be set according to a temporal dimension. For example, replenishment can be limited to monthly orders or twice weekly orders.

Examples of Item quantity modifiers include:

Order Quantity Increment: The order quantity will be a multiple of this value
Minimum Order Quantity: The order quantity cannot be less than this value
Maximum Order Quantity: The order quantity cannot be more than this value
Fixed Order Quantity: The order quantity must equal this number
Economic Order Quantity: The order quantity must equal this number
Order Interval: A time interval during which requirements are aggregated into a single order

Lead-Time Order Modifiers

In contrast, lead-time modifiers define the time constraints for getting the items to their intended destination. For outside purchases, the inputs might include the time to process vendor quotes, to enter the order, to obtain necessary approvals, to transport the item to the dock, to unpack the item, to inspect the item and to inventory the item. For items sourced internally, item lead time modifiers might include distribution and build times.

There are many cases where buyers procure items from multiple sources that have different lead times. In these cases, the planning department should define lead times at the supply source level, and not at the item level. Again, meaningful supply recommendations require accurate and relevant data.

Examples of item lead-time modifiers include:

Internal Processing Time The time to obtain supply source quotes, approvals, and enter the purchase or work order
Supply Time The time the supply source spends to load the goods onto transport
Safety Time Vendor-dependent slack time
Transportation Time In The time it takes to receive the goods on our dock from the supply source
Build Time (Routings) The time it takes to make the goods
Extra Time Vendor-independent slack time
Inbound Time The time it takes to receive, unpack, inspect and put the goods into inventory
Outbound Time The time it takes to pick, inspect, pack and load the goods onto transport
Transportation Time Out The time it takes to deliver the goods from our dock to the client

In summary, item-based order modifiers establish the quantity and time parameters of an order. This information allows the planning engine to back-schedule item requirements from demand requirements.

Depending on the ERP system, these item-level order modifiers enable the planning engine to recommend when to place an order of a calculated quantity; thereby backward planning the item’s requirement date against the sales, production or distribution demand to the replenishment order’s start date.

In next week’s tip, we’ll dig deeper into the next set of critical item-level data: bills of materials and routings.

Your POV (post comments below)

  1. What factors do you consider when determining the value of order quantity modifiers?
  2. How do you make sure your lead-time order modifiers are accurate reflections of actual lead times?
  3. How do you determine lead-time order modifiers for new suppliers?

In this series of bi-weekly tips, we break down the secrets to effective replenishment planning and shop scheduling. Pemeco Consulting is a leading provider of ERP-related services to mid-market manufacturers and distributors. Learn about our Business Requirements Assessment services here, and how we can develop an action-plan to help your business evolve.

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