REORDER POINT & SAFETY STOCK

LEVELS

PSL PLANNING DEPARTMENT JUNE 2013

TAHA BIN EJAZZERMEENA KHAN

PROJECT TITLE

PROGRAM FOR CALCULATING

REORDER POINT & SAFETY STOCK

LEVELS

SLIDE 1/14

MAJOR VARIABLES

Committed FERT Capacities

Active Production/ BOM versions

Material Lead Times

SLIDE 2/14

SOME QUESTIONS

WHY FOCUS OF REORDER POINTS AND SAFETY STOCK LEVELS?

WHY DO WE NEED INVENTORY?

WHY DO WE OPTIMIZE?

SLIDE 3/14

TO BALANCE INFLOWS AND OUTFLOWS

TO CATER FLUCTUATIONS IN DEMAND

TO MINIMIZE HOLDING, FIXED COST AND OTHER TIED-UP FUNDS

& THEIR

ANSWERS

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

Material Shortage Excessive Inventory

CAUSES

Ineffective demand study

Poor supplier management

Excessive production defects

Just-in-case mentality Absence of effective

monitoring Suppliers offer discounts

SLIDE 4/14

WHAT’S THE OBJECTIVE?

SLIDE 5/14

BALANCE INFLOWS WITH OUTFLOWS

HIGH QUALITY PRODUCTS ON LOWEST POSSIBLE COSTS

MINMIZE INVENTORY – WITHOUT COMPROMISE RM

AVAILABILITY

OPTIMAL INVENTORY LEVELS TO REVEAL PROBLEMS

PROJECT DELIVERABLES

SLIDE 6/14

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.

SOP BIRD’S-EYE-VIEW

SLIDE 7/14

THE FIRST PROGRAM

• MATERIAL

GROUPS

• QUANTITIES

INPUT

• SFG QUANTITY

• BOMs

PROCESSOR • RAW MATERIAL

QUANTITY

• MATERIAL

GROUPS

OUTPUT

SLIDE 8/14

Programs\Program 1\Input & Output.xlsx Programs\Program 1\Processor.xlsx

THE RAW MATERIAL QUANTITY CALCULATOR

THE SECOND PROGRAM

•RM DEMAND PER

MONTH

•LEAD TIME

•SERVICE LEVEL

INPUT

•STANDARD DEVIATION

•NORMAL DISTRIBUTION

•RM = SAFETY

STOCK+LEAD TIME

DEMAND

PROCESSOR

• REORDER POINT

• SAFETY STOCK

LEVELS

OUTPUT

SLIDE 9/14

Programs\Program 2.xls

THE REORDER POINT & SAFETY STOCK CALCULATOR

THE SOP

SLIDE 12/14

• EITHER ZLIN, ZCHM OR ZARNSELECT A RAW MATERIAL

• PRODUCT OF GROSS PROFIT % AND RM QUANTITY USAGE PER PAA

CALCULATE STOCK-OUT COST (M) IN USD/PAA

• IDENTIFY COST OF RM PER UNIT AREA USING WAREHOUSE COST CENTRE VALUES

CALCULATE HOLDING COST (H) OF RM FOR DURATION OF

LEAD TIME IN USD/PAA

• SERVICE LEVEL, pIDENTIFY SERVICE LEVEL

• FIND ITS USAGE AS PER FORECAST FROM THE OUTPUT OF PROGRAM-1

IDENTIFY PAST SALES OF RM USING PROGRAM-1

• SELECT A FORECASTING MODEL TO KNOW THE QUANTITY FOR THE DURATION OF LEAD TIME

FORECAST QUANTITY AS PER LEAD TIME

• USE THE EXCEL SHEET AS SHOWN:• Programs\Program 2.xls

CALCULATE REORDER POINT & SAFETY STOCK LEVELS USING

PROGRAM-2

SAMPLESLIDE 13/14

• ZARN: LYCRA 44 Dtex/166L WHITESELECT A RAW MATERIAL

• M = (72% x 0.00023) + 0.00023 = USD 0.004• Programs\STOCK OUT COST.xlsx

CALCULATE STOCK-OUT COST (M) IN USD/PAA

• H = USD 5e-8• Programs\CARRYING COST.xlsx

CALCULATE HOLDING COST (H) OF RM FOR DURATION OF LEAD

TIME IN USD/PAA

• p = 0.99• Programs\SERVICE LEVEL.xlsxIDENTIFY SERVICE LEVEL

• AVERAGE CONSUMPTION = 18.4 KG/MONTHIDENTIFY PAST SALES OF RM USING PROGRAM-1

• EXCEL ADD-IN USED FOR FORECASTING FOR THE LEAD TIME DURATION

FORECAST QUANTITY AS PER LEAD TIME

• ROP = 60 KG, SAFETY STOCK = 18 KG• Programs\Program 2.xls

CALCULATE REORDER POINT & SAFETY STOCK LEVELS USING

PROGRAM-2

SLIDE 14/14

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

CONCLUSION

RAW MATERIALLYCRA 44 Dtex/166L WHITE

ACTUAL CALCULATED

SAFETY STOCK 0 18

REORDER POINT 100 60

THANK YOU!ANY QUESTIONS?