REORDER POINT & SAFETY STOCK LEVELS

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PROJECT TITLE
PROGRAM FOR CALCULATING REORDER POINT & SAFETY STOCK LEVELS

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MAJOR VARIABLES
Committed Active

FERT Capacities

Production/ BOM versions

Material

Lead Times

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SOME

QUESTIONS
WHY FOCUS OF REORDER POINTS AND SAFETY STOCK LEVELS? WHY DO WE NEED INVENTORY?

& THEIR

ANSWERS
TO BALANCE INFLOWS AND OUTFLOWS TO CATER FLUCTUATIONS IN DEMAND TO MINIMIZE HOLDING, FIXED COST AND OTHER TIED-UP FUNDS

WHY DO WE OPTIMIZE?

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WHAT ARE THE SYMPTOMS OF POOR INVENTORY MANAGEMENT (PIM)?

Material Shortage CAUSES Excessive Inventory

Ineffective demand study Poor supplier management Excessive production defects

Just-in-case mentality Absence of effective monitoring Suppliers offer discounts

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WHATS THE OBJECTIVE?

BALANCE INFLOWS WITH OUTFLOWS HIGH QUALITY PRODUCTS ON LOWEST POSSIBLE COSTS MINMIZE INVENTORY WITHOUT COMPROMISE RM AVAILABILITY OPTIMAL INVENTORY LEVELS TO REVEAL PROBLEMS

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PROJECT DELIVERABLES

Optimal inventory levels A program to identify the quantities of raw materials INPUT: Forecasted values of order quantities OUTPUT: Production Budget for all Raw Materials Identify possible opportunity costs for planned projects.

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SOP BIRDS-EYE-VIEW

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THE FIRST PROGRAM

THE RAW MATERIAL QUANTITY CALCULATOR

MATERIAL GROUPS QUANTITIES

PROCESSOR
SFG QUANTITY BOMs

RAW MATERIAL QUANTITY MATERIAL GROUPS

INPUT

OUTPUT

Programs\Program 1\Input & Output.xlsx

Programs\Program 1\Processor.xlsx

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THE SECOND PROGRAM

THE REORDER POINT & SAFETY STOCK CALCULATOR

RM DEMAND PER MONTH LEAD TIME SERVICE LEVEL

PROCESSOR
STANDARD DEVIATION
NORMAL DISTRIBUTION RM = SAFETY STOCK+LEAD TIME DEMAND

REORDER POINT SAFETY STOCK LEVELS

INPUT

OUTPUT

Programs\Program 2.xls

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THE SOP
SELECT A RAW MATERIAL

EITHER ZLIN, ZCHM OR ZARN

CALCULATE STOCK-OUT COST (M) IN PRODUCT OF GROSS PROFIT % AND RM USD/PAA QUANTITY USAGE PER PAA CALCULATE HOLDING COST (H) OF IDENTIFY COST OF RM PER UNIT AREA USING RM FOR DURATION OF LEAD TIME IN WAREHOUSE COST CENTRE VALUES USD/PAA IDENTIFY SERVICE LEVEL IDENTIFY PAST SALES OF RM USING PROGRAM-1 FORECAST QUANTITY AS PER LEAD TIME CALCULATE REORDER POINT & SAFETY STOCK LEVELS USING PROGRAM-2

SERVICE LEVEL, p
FIND ITS USAGE AS PER FORECAST FROM THE OUTPUT OF PROGRAM-1

SELECT A FORECASTING MODEL TO KNOW THE QUANTITY FOR THE DURATION OF LEAD TIME
USE THE EXCEL SHEET AS SHOWN: Programs\Program 2.xls

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SAMPLE
SELECT A RAW MATERIAL

ZARN: LYCRA 44 Dtex/166L WHITE M = (72% x 0.00023) + 0.00023 = USD 0.004 Programs\STOCK OUT COST.xlsx H = USD 5e-8 Programs\CARRYING COST.xlsx p = 0.99 Programs\SERVICE LEVEL.xlsx

CALCULATE STOCK-OUT COST (M) IN USD/PAA CALCULATE HOLDING COST (H) OF RM FOR DURATION OF LEAD TIME IN USD/PAA IDENTIFY SERVICE LEVEL

IDENTIFY PAST SALES OF RM USING PROGRAM-1

AVERAGE CONSUMPTION = 18.4 KG/MONTH EXCEL ADD-IN USED FOR FORECASTING FOR THE LEAD TIME DURATION ROP = 60 KG, SAFETY STOCK = 18 KG Programs\Program 2.xls

FORECAST QUANTITY AS PER LEAD TIME

CALCULATE REORDER POINT & SAFETY STOCK LEVELS USING PROGRAM-2

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CONCLUSION
LYCRA 44 Dtex/166L WHITE RAW MATERIAL ACTUAL SAFETY STOCK 0 CALCULATED 18

REORDER POINT

100

60

THESE CALCULATIONS HAVE HELPED US SEGREGATE SAFETY STOCK FROM ROP

ALSO IN IDENTIFYING WHEN THE ORDER MUST BE PLACED, KEEPING IN MIND THE CONSUMPTION AND LEAD TIME