Implementation of MRP by reorder point

The implementation of corporate information systems (hereinafter referred to as CIS) has a completely reasonable justification: automation of business processes, allowing employees to focus their attention on the most important operations of the campaign, minimizing routine, unimportant transactions. Implementation of CIS can be carried out on the basis of full or patchwork implementation strategies. In the latter case, only a part of the enterprise’s key processes are subject to coverage by CIS functionality.

One of the few information system functionalities included in a separate implementation subproject is Material Requirement Planning (hereinafter referred to as MRP) [1]. There are different types of MRP depending on the type of production and the complexity of planning: planning based on consumption, planning by reorder point (Reorder Point, hereinafter referred to as ROP), seasonal planning, etc.

The simplest type of MRP is planning by reorder point (ROP). The essence of ROP comes down to measuring parameters characterizing the state of the warehouse: the current level of product inventory and the value of the reorder point for it. If the reorder point value exceeds the current stock level, the procedure for replenishing products through internal production or purchasing from an external supplier is launched (Fig. 1). Implementation of ROP in the ERP (Enterprise Resource Planning) standard predicts difficulties [2]. In particular:

• collection of statistical information;

• integration of business processes and change management of corporate information systems;

• processing and loading data into CIS;

• launch of materials planning in CIS.

Collection of statistics, processing and loading of data, as well as the gradual launch of planning are inherent in any project, regardless of the moment of implementation of the ROP procedure, while the alignment of existing processes to use the reorder point is a bitter inevitability if this functionality is implemented much later than the basic ERP. Let us consider each of the points in more detail below.

Collection of statistical information

The ROP procedure is shown schematically in Fig. 1. Analyzing the above figure, we can identify the following main parameters used when processing the reorder point:

• the value of the current stock of products in the warehouse;

• value of the reorder point for products;

• stock replenishment time (planned delivery dates);

• order quantity.

Let's look at how the ROP procedure works in the CIS. Every day, most often at night, the current level of product inventory is measured in the warehouse. The reorder point value is first manually set for each product range. If the stock value is below the reorder point, a replenishment procedure is launched, for example through a purchase from a supplier.

During the purchase of products, its stock must be positive until it is received into the warehouse. Thus, after the occurrence of a reorder event and actual replenishment, the warehouse stock should not be zero in order to avoid product shortages and stop the campaign. Formula 1 shows the relationship between the parameters characterizing the inventory replenishment process.

Reorder Point = ConsumptionDay / Planned Delivery Dates, (1)

where ConsumptionVDay characterizes the volume of products consumed in 1 day, Planned Delivery Dates – the delivery time of materials from the supplier to the warehouse in days. In total, if 5 units of product are required daily, and the delivery time is 3 days, then the reorder point according to (1) will be equal to 15. The calculation is quite intuitive: if 5 units of material are consumed every day, then there are 3 days (15/5 = 3) to replenish the warehouse, which will be the planned delivery date.

Let us remember the parameters of formula (1) for further analysis. Consider the following parameter from Fig. 1: order quantity. How to correctly calculate this parameter? Let's use Wilson's formula to determine the optimal delivery quantity (Economic Order Quantity, hereinafter referred to as EOQ) [3].

EOQ = √(2 * Receipt Cost * ConsumptionWMonth / CostStorageStorage), (2)

where ZatrObrZak determine the costs in rubles for processing 1 order for the supply of products from the supplier to the warehouse, PotrebMes – the amount of products consumed in 1 month, CostHranSklad – the costs in rubles for storing these products in our own warehouse per month. The last parameter depends on the cost of production and is calculated using formula (3).

CostStorageStorage = Percentage * CostProducts, (3)

where Product Cost sets the price of the purchased product, and Percentage determines the percentage of storage costs depending on the cost.

So what does EOQ do? Formulas (2)-(3) specify the quantity of products that will be ordered from the supplier each time the reorder point is triggered. In this regard, a logical question arises: what is the optimal quantity of products to order and what is the optimal number of orders from the supplier per month?

Formula (2) answers these questions: the higher the cost of processing one purchase from a supplier compared to the cost of storing products in your own warehouse, the fewer orders should be created, that is, each order will provide supply for a larger number of products in view low cost of storage in warehouses. The reverse is also true.

To summarize, the list of parameters required to calculate ROP, given at the beginning of the section, should be clarified and written in the following form:

• the value of the current stock of products in the warehouse;

• value of product consumption per day and for 1 month;

• stock replenishment time (planned delivery dates);

• processing costs for 1 purchase order;

• cost of production.

Thus, performing the simplest task of determining the value of the reorder point turns into collecting and analyzing a significant amount of historical information, requiring considerable labor. So maybe you shouldn’t waste time and indicate the value of these parameters without going into too much detail? According to formula (1), this can lead to a shortage of products when the supply of material is completely depleted and its replenishment has not yet been completed; following formulas (2)-(3), an increase in production costs due to indirect costs is inevitable.

Integration of business processes and change management of corporate information systems

Implementation of the ROP procedure in the case when basic business processes are already implemented in the CIS requires alignment of the system's business transactions. When considering the functionality of the reorder point of modern CIS, it is worth mentioning ABC and XYZ analysis [4], characterizing the cost of inventories and the regularity of their consumption (Fig. 2). In CIS implementation projects, for example, SAP ERP [5], the ROP functional is used for the CX level of the ABC-XYZ matrix. In particular, reorder points have found widespread use in planning spare parts in manufacturing plants. Typically, the cost of spare parts is low, and the regularity of consumption is quite stable, thus such materials are identified with the CX level of the matrix…

However, even in this case, continuous integrated processes must be considered: spare parts must be purchased, stockpiled for further consumption, and possibly resold to the customer. Thus, the introduction of the simplest ROP planning procedure requires the comparison of at least 3 processes. In addition, the latest CIS make it possible to carry out both procurement and sales for a specific need, in simple terms, targeted, which should also be reflected in the ROP planning procedure. So what should you do when implementing ROP from a process integration perspective? Let's use the change identification scheme (Fig. 3):

• First, you need to understand which existing processes are clearly impacted by ROP functionality. For example, as stated earlier, repair operations involve purchasing, inventory, and distribution. As a result of the analysis, there may be a need to customize CIS processes that were not previously planned for change;

• secondly, through regression testing, it is possible to identify existing CIS processes, the execution of which in a given sequence potentially affects the operation of the ROP procedure. In such cases, the order in which business transactions are carried out is subject to change. For example, open purchase orders are treated by SAP ERP as planned receipts, which reduces the quantity purchased according to the ROP. The latter will lead to stock-outs if purchase orders are open but have long since expired. Changing the process will require regular monitoring and closure of such orders;

• and finally, thirdly, the planning procedure is highly dependent on system data, both basic and variable. The slightest error, for example in the material master record, can lead to completely irreparable planning results. As discussed in the example above, the situation is similar with variable data. If before the implementation of the reorder point functionality, CIS users were allowed some inaccuracy in maintaining data, then after this this was excluded.

Literary source:

Stepanov D.Yu. Features of MRP implementation at the reorder point // Corporate information systems. – 2018. – No. 1. – P. 30-39. – URL: http://corpinfosys.ru/archive/issue-1/47-2018-1-rop.