Long lead time items must be planned for stocking
Items with extremely long lead times must be planned for stocking because purchasing such items to order would cause unacceptable delays to jobs.
Forecast type purchasing is the traditional planning method
Many small businesses traditionally use forecast type methods to purchase long lead time items. One such method is to create an occasional large purchase order that supplies projected demand over one lead time cycle. Another such method is to create blanket purchase orders that replenish stock at pre-set intervals to supply projected demand over time.
Forecast type purchasing is vulnerable to lengthy shortages
Any forecast type purchasing method is vulnerable to lengthy shortages whenever planned supply fails to cover actual demand. If the next purchase order does not get expedited, which is often not possible, the shortage can be of long duration with costly job delays as a consequence.
Forecast type purchasing is also vulnerable to severe over-stocking
Any forecast type planning method is also vulnerable to severe over-stocking whenever planned supply significantly exceeds actual demand. In many cases the next purchase order is already in progress and can’t be cancelled or delayed, which results in excessive stock on hand that ties up working capital and storage space.
MRP generates a demand-driven supply pipeline
Time to Shipment MRP generates a demand-driven supply pipeline for long lead time items that prevents lengthy shortages and severe over-stocking. Instead of attempting to synchronize future supply with projected demand, stock replenishment planning is used to trigger a pipeline of demand-driven POs, each due to arrive at staggered intervals.
A Reorder Point is calculated from a monthly usage rate and safety buffer
For each long lead time item, you enter a monthly Usage rate along with a Safety Factor buffer to cover potential variance above the monthly average. The program applies these settings to the item’s Lead Days allocation to calculate a dynamic Reorder Point. The Reorder Point will have a relatively high value because of the long lead time, but don’t worry, it is a trigger point, not a stocking level.
A Min Order quantity is calculated from a supply days interval
A Supply Days interval is entered, which is the desired interval between purchase orders. The Supply Days and monthly demand settings combine to calculate a dynamic Min Order quantity.
Purchase orders are demand-driven
A purchase order gets triggered whenever actual demand causes the total supply pipeline (stock on hand plus all open purchase orders) to fall below the item’s Reorder Point. The purchase order quantity will be for the item’s Min Order quantity or greater if needed.
The supply pipeline is self-adjusting
Unlike blanket purchase orders that must be manually adjusted to stay synchronized with actual demand, which is often not possible with long lead time items, a demand-driven supply pipeline is self-adjusting.
When actual demand is greater than the monthly usage rate and safety buffer, the next purchase order gets triggered immediately, even when other purchase orders for the item are already in progress. When actual demand is less than the monthly usage rate, the next purchase order is automatically delayed, which caps stock on hand and prevents over-stocking.
The pipeline ensures that any shortages are of short duration
A demand-driven supply pipeline for an item often consists of multiple open purchase orders, each due to arrive at staggered intervals. If a shortage happens to occur, it will be short in duration because the next purchase order in the supply pipeline is likely to arrive soon.