Replenishment Planning

Unlike Stock Status Systems, SMS breaks down the projected forecast into 365 days.  This could mean different values for each day of the year.  If an item is seasonal, summer values could be much higher than the winter values.  SMS rolls these daily projections up into weeks.  Since the Stock Status System has a record of all expected orders coming in, SMS can blend these weekly forecasts and scheduled orders into a replenishment plan detailing 52 weeks of stocking levels.

SMS starts with the current on-hand inventory level then simply deducts weekly forecasts and adds weekly replenishments already scheduled.  SMS also takes into consideration safety stock and deducts it from the on-hand at the end of lead time to project a "worst case" scenario.  Each week a stocking level is projected and, when negative, SMS determines that an order should be scheduled to arrive in that week.  Since that order should have been placed one lead time in advance, SMS can determine when orders should be placed.  SMS has also determined the proper EOQ which means that SMS can show exactly how much to order and when to order it.  This becomes a "time-phased" replenishment schedule.  This schedule is unique to SMS and is an extremely useful tool for inventory planners to use.

Stock Status Systems simply determine if the on-hand value goes below an arbitrary MIN value (usually an "intuitive guess" MIN value), then orders a Stock Status EOQ (usually an "intuitive guess" as well).  Stock Status Systems do not care if the on-hand quantity approaches several years of excess - no MIN trigger has been hit.  Thus, Stock Status Systems usually encourage over stocking of inventory.  SMS addresses this over stock problem by minimizing the EOQ and setting a proper MIN (safety stock plus lead time forecast).

SMS places each item into an ordering code category.  Each of these categories makes it easy for the user to review items based on a specific condition.  The lead time horizon is always the planning period for analysis.  If the lead time is correct, any item can be ordered and delivered within this lead time horizon.  With this in mind, requirements needed before lead time require some expediting action.  Ordering before lead time means unnecessary (and excessive) ordering.  Ordering time is another important part of inventory optimization.

SMS ordering codes are:
  • ( -3) Current Back Order
  • ( -2) Projected Out-of-Stock before lead time
  • ( -1) Normal Reorder (may use some safety stock)
  • (  0) Balanced Item (not more than one EOQ - not a negative balance)
  • (+1) Overstocked (not ordering more)
  • (+2) Overstocked (still ordering - adding to the excess)
  • (+3) Surplus (more than 1 year supply)
The above categories represent each item's stocking level at the end of the lead time horizon.  For example, if an item has more than one EOQ left at the end of lead time it is over stocked (code +1).  If that item also has outstanding replenishment orders coming into stock (increasing on-hand), it becomes "over stocked and still ordering" (code +2).  A review of these +2 items would be an excellent strategic tool to cancel these unnecessary orders or push them out into the future to prevent unnecessary stock build-up.   Careful review of these over stocked reports in SMS helps keep inventory investment low.

Conversely, an item which may have stock on-hand at present could be headed for a shortage if SMS shows that the on-hand stock will run out (e.g., go negative) in week 6 for example.  If the lead time is 8 weeks, then some expedite action must be taken to get delivery faster than the normal 8 weeks.  These types of items are "stock outs" waiting to happen.  There is a hidden cost here as well.  Many times a planner will have to pay a premium for expedited delivery (i.e., air freight charges, overnight charges, etc.).  Not ordering enough also impacts the cost of inventory.

The biggest mistake in managing inventory is to minimize inventory.  The key to inventory management is to minimize the cost of providing the proper level of inventory stock!  Get rid of excess storage and carrying costs.  Eliminate unnecessary expedite costs.  Procure the right amount at the right time!