Our Stocking Demand Order Policy combined with the use of Supply Days to control your PO intervals is the ideal way to handle long lead day purchasing. The supply days will create a pipeline of multiple inbound POs, each due to arrive at staggered intervals, to meet and adapt to your actual demand.
MRP Settings Example
Item Type = Purchased
Order Policy = Stocking Demand
Replenishment Time = 90 Days
Monthly Demand = 30
Auto Calculated Reorder Point = 90
Supply Days = 30
A High Reorder Point Does Not Equal Increased Inventory on Hand
In our example, you will see that the calculated reorder point is 90 but your actual stock on hand remains very low. At any given time in our example, there are 3 inbound POs spread out every 30 days in various stages of progress. This pipeline of inbound POs helps greatly moderate the effects of any potential shortages. In manual planning methods, you can have a situation where you run out of stock and you must wait a full 90 days before you can use the component in a Job. That can be a complete disaster to your schedule. By contrast, a shortage in DBA will just be a portion of the planning period due to the multiple inbound POs at any given time.
Stock Monthly Demand + Supply Days also allows you to handle long lead day purchasing with as lean of an actual quantity on hand inventory as possible. In this scenario, you can see that your quantity on hand is trending toward zero toward the back end of the supply days interval.
Long Lead Days Fundamentals
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.
Manual purchasing is vulnerable to lengthy shortages
Any manual 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.
Manual purchasing is also vulnerable to severe over-stocking
Any manual 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
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.