Introduction: In this blog, I will explain how Automatic reorder point planning works and how the system calculates automatic reorder points. In other words, the formula behind it.
Note: Because of content, I will divide this blog into 2 parts.
- Part 1: Covers consumption-based planning when to use it, and what's the formula for automatic reorder point calculation.
- Part 2: How to carry out automatic reorder point planning within the material master. Explanation of formula in Excel. Automatic Reorder Point (MRP Type: V2 or VM) Planning – Part 2
This blog is prepared about S/4 HANA and MRP Live.
The function of MRP: Material Requirements Planning's (MRP) main job is to keep track of stocks and, in particular, to automatically create purchase proposals for buying and making things.
Results of an MRP Run: The possible procurement proposals that can be created by the automatic planning run are:
- Planned orders (For procurement type: E or X)
- Purchase requisitions (For procurement type: F)
- Scheduling agreement delivery schedule lines (For procurement type: F)
Consumption-Based Planning: Consumption-based MRP procedures use material prediction or static MRP procedures to figure out what materials will be needed in the future based on how much was used in the past. MRP processes based on consumption have nothing to do with the master plan. So, an independent or dependent requirement does not make the net requirements estimate happen. Instead, the net requirements calculation is done when a stock level goes below a reorder point or when forecasted needs are calculated from consumption data from the past. Consumption-based planning processes are easy to use and don't take much work to put into place.
MRP Procedures
When to use CBP (Recommendation): It is suggested that these methods be used for B and C materials, which are low-value materials whose usage doesn't change much.
Consumption-Based Planning Recommendation
In consumption-based planning, there are many MRP methods (called "MRP Types"), but this blog will focus on automatic reorder-based planning (MRP type: V2 or VM).
Within Automatic reorder point planning, we have 2 MRP types available:
- MRP Type VM: Automatic reorder point planning
- MRP Type V2: Automatic reorder point with external requirements.
"Including external requirements" is what makes them different. What are needs from the outside?
As shown below, MRP type: VM will count sales orders and reservations as extra demand on top of the restart point. "Include ext. reqmt" is a field in the MRP-type configuration that controls the following numbers and system behavior:
- Blank: No external requirements are taken into consideration
- 1: All of the horizon considers external needs like sales orders and reservations.
- 2: Only external needs, like sales orders and reservations, are taken into account during the lead time for replenishment.
With External Requirements
Automatic Reorder Point Calculation and Formula:
- Automatic reorder point = safety stock + daily requirement * replenishment lead time
As shown above, the Automatic reorder point includes safety stock; below is a formula for safety stock.
Safety Stock = R * square root of W * MAD
R = R Means Service Level Factor. The MRP-2 service level has an equal factor. The next number shows that 50% of customer needs can be met without safety stock. It also shows how hard it is to meet customers' needs 100% of the time. Factor R shows how the accuracy of the prediction relates to the service level (SL).
SL(%) and Factor R
W = Delivery Times in Days / Forecast Period in Days
If the material is produced in-house, the delivery time is opening period + in-house production time + goods receipt processing time. It is expressed in workdays. The forecast period is taken from the material master record and expressed in workdays.
If the material is procured externally, the delivery time is goods receipt processing time + planned delivery time. It is expressed in calendar days. The forecast period is taken from the material master record and expressed in calendar days.
MAD = Stands for Mean Absolute Deviation (MAD) measures the accuracy of the forecast by averaging the alleged error. The system uses the original forecast and Ex-Forecast to identify the difference/accuracy of the forecast, and the average absolute difference is MAD. I will explain this with an example (please check part 2).
Note: You can specify a minimum safety stock. If the result of the safety stock calculation is lower than this limit, the safety stock is then automatically set to this minimum value. You enter the minimum safety stock in the material master record (the MRP 2 screen)
Part 2: How to carry out automatic reorder point planning within the material master. Explanation of formulas in Excel. Automatic Reorder Point (MRP Type: V2 or VM) Planning - Part 2
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