If inventory counts and movements aren’t accurately reflected in the planning engine, MRP will issue inaccurate recommendations. This might mean that replenishment order recommendations are issued to soon – which could lead to unnecessary increases in operating costs and constraints to cash flow. It might also mean that replenishment order recommendations are issued too late – which could create customer churn caused by avoidable order delays. Finally, it might mean that replenishment order recommendations are made for the wrong items or quantities – which could result in unnecessary orders of depreciating inventory.
The key, therefore, is to ensure that the planning engine issues planning recommendations for the correct items and quantities at the appropriate times. To issue just-in-time, time phased replenishment orders, the planning engine requires five basic data elements:
- The projected demand of an item over time
- The projected supply of this item over time
- The minimum inventory level requirements at all times
- The calculated projected available quantity of this item at any point in time
- The time it takes to cover the projected shortfall (i.e. the calculated projected negative available quantity at any point in time)
Let’s take a look at how this might work for a bicycle manufacturer. A wheel rim is a component of a bicycle, and we’ll use that as our item example.
In the first stage of the analysis, we would want to analyze the projected demand for the delivery of wheel rims. As the following graph shows, we will be required to deliver eight wheel rims in Week 4, five wheel rims in Week 7 and seven wheel rims in Week 10.
Then, we take a look at our existing supply replenishment orders. As the graphs below shows, we’re expecting to receive two wheel rims in Week 3 and seven wheel rims in Week 5.
For wheel rims, we have no minimum inventory requirements (in this unrealistic example, we have no safety stock requirements because item quality and delivery reliability are both perfect).
In terms of current inventory levels, we have two wheel rims on hand.
By reconciling the data above (i.e. demand requirements, replenishment requirements, safety stock requirements and on-hand inventory), we can see how many wheel rims we have available at given time. The following table shows the relationship among the various inventory data and the available wheel rim quantities at any given week.
|Week 1||Week 2||Week 3||Week 4||Week 5||Week 6||Week 7||Week 8||Week 9||Week 10|
|Safety Stock (minus)||0||0||0||0||0||0||0||0||0||0|
When the total available quantity is negative, the company is projected to have insufficient inventory to cover demand. As you can see in the following graph of Total Available Quantity, the company is projected to have a shortfall of wheel rims in Weeks 4, 7, 8, 9 and 10.
When this inventory-related data is interpreted (along with the other required data inputs), the planning engine will issue replenishment recommendations to ensure that there is a sufficient quantity of available inventory to satisfy demand.
In this case, the planning engine will recommend that the company issue replenishment orders of 1) four wheel rims in Week 4, and 2) five wheel rims in week 10. These replenishment recommendations will ensure that the company will be in a position to satisfy its demand requirement. The relationship between the Old Available Quantity (as displayed above), Replenishment Recommendations and the New Available Quantity is displayed in the following graph:
It’s important to note that this graph displays when the company needs to receive the replenishment order to be in a position to satisfy demand. The date on which the planning engine will recommend that the order be placed will depend on the accuracy of input data relating to lead times and other item-related modifiers.
The key take-away is this: the planning engine assumes the present state of the system reflects accurate data. If planned receipt dates of actual replenishment orders and planned delivery dates of actual demand orders are faulty, the planning engine will issue faulty recommendations. And, reliance on faulty recommendations can cause your company to lose customers, waste valuable cash flow, and unnecessarily invest in depreciating inventory.
To ensure that the planning recommendations are accurate and reliable, you should continually:
- Ensure that inventory counts are accurate. To ensure that on-hand quantities in the system reflect the correct numbers on the shelves and the shop floor), the company needs to:
- Record all movement transactions (issuance, receipt and transfer of goods) accurately, completely and as soon as they happen; and
- Periodically cycle count inventory to adjust for inevitable discrepancies
- Ensure that planned demand delivery dates and planned supply receipt dates are accurate by:
- Correcting planned demand delivery dates as soon as changes are known and canceling demand as soon as the cancelation happens;
- Correcting planned supply receipt dates as soon as changes are known and cancelling supply as soon as the cancelation happens
We’ve come a long way in building a solid foundation to ensuring that the planning engine issues meaningful replenishment recommendations. In Planning Tips 1 to 4, we covered critical item-based order modifiers. In this Planning Tip, we covered the importance of maintaining accurate inventory-related data.
In the next tip, we will break down order status maintenance – the process whereby the system is kept apprised of the stage that a replenishment order is at – on our manufacturing floor or at a supplier.
Your POV (post comments below)
- How often does your organization perform cycle counts? Is it frequent enough? Too frequent?
- What is the minimum level of inventory accuracy (expressed as a percentage) that is acceptable from a planning perspective?
Would your organization like to reduce supply chain and inventory costs, and improve production efficiency? If so, contact our ERP and operations experts to learn how we can help.
In this series of bi-weekly tips, we break down the secrets to effective replenishment planning and shop scheduling using MRP. Pemeco Consulting is a leading provider of Supply Chain and ERP services. Learn about our ERP Optimization and Training Services and our how our Planning Dashboard can help your organization improve planning accuracy and reduce supply chain costs.