The Difference between using a Reorder Point Procedure or a PD with Safety Stock
Have you ever wondered why planners tend to rather use a safety stock with MRP Type ‘PD’ to buffer variability, as opposed to a reorder procedure? Oftentimes PD is used across the board and no one wants to bother with another MRP type. However, with SAPs standard configuration the safety stock doesn’t serve as a planning buffer and the additional inventory ends up being dead stock.
Consider the following scenario: a safety stock of 30 pieces is set and a production order asks for 10 pieces on April 15. A deterministic planned material (PD) would replenish the inventory up to 40 pieces just before April 15. If, for some reason, the production order would increase the required quantity to 15 pieces two or three weeks before its start date, the MRP run (which excludes safety stock in the net requirements calculation) would generate an additional order proposal for 5 pieces. In that case, the inventory on April 14 would be 45 pieces… even though 40 would be plenty (25 more than needed). Simply speaking: safety stock is taken out of the planning efforts and the entire safety stock remains unused (…becomes dead stock).
A far better solution, in my opinion, is the use of a reorder point method. If we’re taking the same example, we’d set the reorder point to 30 pieces and thge MRP run would only replenish if the inventory level is lower than 30. During the replenishment lead time these 30 pieces serve as a true buffer and are consumed by regular consumption. Any safety stock that is set, is only used as a signal (exceptional message) when inventory gets really low. As you can see in below graphic, this method is a true buffering strategy.
Switching your policy from a PD with safety stock to a reorder point procedure will instantly reduce your dead stock and bring average inventory holdings down. If you’re concerned about stock-outs, increase the reorder point. That is much better than never dipping into safety stock.
(note: if you’re adamant about using PD. you can customize SAP so that at least a portion of the safety stock is considered as a buffer for planning)
Thanks for the very interesting post.
I recently had this very exact discussion (PD+SS vs ROP) with a client's supply chain manager who commented that he had always used PD+SS and argued one procedure for everything was less confusing.
As you know, ROP (VB) is consumption-based and not actually an MRP procedure. As a first rule, I use PD if you have visibility over future demand, or VB if you don't (e.g. non-BOM indirect materials). This customer, however, argued that PD+SS would work just as well: the requirements part in the MRP equation would be 0, and the system would target for the safety stock. Your post does a good job of showing a subtle but important difference.
Or are you thinking of reorder point with external requirements (V1)? While this procedure does include future requirements it has always been an odd concept for me, as by definition the reorder point already includes the expected future requirements.
If people say that using one procedure is less confusing than they never want to play in the major league... and they for sure wouldn't get there because if a football coach uses only one play than that team wouldn't score a single point. Like in any game, inventory optimization requires a versatile and flexible set of policies so that you can automate replenishment with the best possible results for inventory and service levels. It is simply not true that a pd + SS produces the same result than a ROP procedure. Both have the right to exist but they need to be used in different situations.
On top of those two there are many more policies. As an example, you could use a reorder point procedure that does consider external requirements within the replenishment lead time. In that case you combine a backwards looking replenishment policy with a forward looking, deterministic procedure (but only out to the end of the lead time). nothing wrong with it when the situation calls for such a thing (for example when you have large, unexpected spikes but otherwise consistent consumption.
The point I wanted to make is that a static safety stock ion SAP (with its standard customization) does not let the inventory fall below the safety stock level and therefore keeps a too high level of dead stock. A ROP procedure does not do that... your client's sc manager, I believe, does not understand that because he thinks the same result is achieved. but that's simply not true. Take a material with PD + SS and display the past consumption graph in MC.9 over the past year and you will see that the inventory never fell below the safety stock
It so interesting your point of view.
I have some doubts about it. In your example you would set the reorder point to 30. How much would be the proposal quantity? The proposal quantity would be enough to cover order requirements?
from my point of view it depends on the actual business situation.
PD+SS is more complex and logical. but all system settings can be well supported by forecast data or historical data.
ROP setting seemly to be simple. but the acurated reorder point is not easy to be calculated and understood. (esay business can use ROP)