Requirement Planning Logic
In DemandCaster, there are two discrete requirement planning calculation sections:
- During an items lead time
- Beyond an items lead time
During an items lead time, the basis of the replenishment order is the items Order Point. The Order Point is the level of inventory needed to accommodate an items projected demand over the lead time plus the additional needed to accommodate any demand or supply variation.
This article covers how the order point is calculated, provides an explanation of the basic replenishment order calculation, and outlines all the planner action notifications and rules that follow to illustrate the urgency of and timing of a planned order.
The order point is managed in the Order Point Calc Analysis and is calculated by adding the forecast during the lead time plus the safety stock. A user may also enter their own order point or upload the value from their ERP.
The article Basic Order Quantity and Replenishment Logic provide a detailed overview the logic.
Once the order point is calculated, the items replenishment is then determined by comparing the items lead time availability against its calculated order point (sometimes called future free). If the net availability is greater than the order point, then the item does not need to be ordered to cover lead time demand. If the net availability is less than the order point, a quantity up to a specified level is ordered (Order Up To).
Availability is calculated as: On Hand + On Order - Allocations (over the lead time)
The following table illustrates all the associated calculations. We have excluded allocations for the sake of simplicity.
Note: An item that is make or purchase to order has a reorder point of 0 (no forecast or safety stock) and a suggested order will not be issued unless there are physical customer orders that are greater than the items on hand and on order during the lead time or at any time during the planning horizon.
Based on the above mentioned parameters, it is very important that a number of critical variables be correctly defined by item. Below are the critical data related requirements that you should review to assess if the settings are correct in DemandCaster. All these settings may be modified directly in DemandCaster and should be reviewed at least monthly to assure accuracy. If these are incorrect, DemandCaster may over or understate the companies inventory requirements as compared to reality. As a starting point, all item values are pulled directly from the ERP system but can be overwritten as described in the Applying Settings in Options Tab, Item Selection, and Analytics via Multi-Edit article.
- Lead Time: This is how long it takes from the time you place an order to receive the order (not cycle time or production time). A lead time that is too short or too long may under or overstate the items reorder point. Other lead times such as order lead time and transfer lead time, if available, should be reviewed as well. We often see items with a lead time of 0. A 0 lead time assumes immediate availability of a replenishment order and no safety stock. This is the number one reason why unusual suggested orders are created.
- Make versus Purchase Policy: This establishes if an item is purchased versus manufactured. An item that is set as purchased (Buy) will not explode its requirements through its bill of material. Only manufactured items explode their requirements.
- Maintain in inventory versus build or purchase to stock: This is the determination of what should be maintained in inventory (stocked) versus made / purchase to order. This is a company specific decision that has significant cost and service implications because inventory, purchasing, and manufacturing decisions are made using this information. A standard rule of thumb is if an item can be procured or produced faster than your commitment to ship to your customer (assuming capacity is available), then the item should not be stocked.
- Bill of Material (BOM): The is the structure of a finished goods assembly. It is important that these are structured correctly in order to pass down forecasts and plans through to components . You can view the BOM structure in item plan screen. It is very important that a bill of material have the correct unit of measure conversions through the bill to assure the explosions to components are correctly translated.
- On hand quantities: If these are incorrect you may over or under order your inventory. You can view current on hand inventory or in the item detail view.
- Active and inactive items: A user has the option to deactivate or disable items. This means that the item is no longer visible.
- Customer, production, purchase order statuses: Assuring that these orders are properly showing that they are open, closed, or planned has a direct effect on the requirement plan.
- Distribution and manufacturing network relationships (if DRP is enabled): Proper source and destination location relationships need to be correctly defined.
DemandCaster default requirement planning bucket size is a week. Suggested orders are defaulted to a specific day of the week set in system settings. As an option, when managing short lead times (less than 14 days), you may opt for daily requirement planning buckets. This is a much more finite and precise requirement planning approach.
DemandCaster's week is also settings based and should be determined when the account is provisioned.
Based on all the aforementioned calculation and parameters, the requirement planning logic runs as follows:
- During Lead the order point rules apply. Each order item is reviewed to assess if the net available is either over or under the order point during the lead time. If the net available is less than the order point, a suggested order is created in the planner action and includes the following information by item and location (if applicable):
- Need by date
- Order by date
- Based on the above, DemandCaster will illustrate urgency using the following messages.
- Urgent: The item is either stocked out or at risk of going negative during the lead time. There is no open order to expedite during the lead time so a new order must be entered and brought in at the date suggested in order to avoid stocking out.
- Expedite: A current open order needs to be expedited to prevent the item from stocking out or breaching the safety stock during the lead time.
A detailed explanation of the Planner Action messages are provided in the article Planner Action Action and Reason Code Definitions.
- The planned replenishment orders are scheduled by week using the safety stock level as the reorder trigger. When the order is triggered, the planner action includes the following information by item and location (if applicable):
- Need by date
- Order by date
- The following messages also accompany each line to illustrate what action should be take:
- Normal: A new order is required to maintain stock at or above safety stock by the end of the lead time and each planning period beyond the lead time.
- Exp. Future Order: Orders that are in the planning horizon beyond the lead time are suggested to be expedited to an earlier date in order to prevent a potential stock out or breach of safety stock.