So you’ve done the necessary setup, reviewed the forecasts and it’s finally time to start generating orders. The only problem is that the order quantities recommended by the App appear to be a little off in your opinion. Now what? In this article we will unpack how the Recommended order quantity is calculated taking into account the variables that are used for the ordering levels.
There are 3 sections you can refer to on the product Inquiry screen:
The computation of ideal levels which can be found on the Policy panel
Your Net Stock position which can be found on the Inventory Position panel
The order recommendation based on the ideal levels and your Net Stock position which can be found on the Order Recommendation panel
Consider the following example of an item on the product Inquiry screen:
Computation of ideal levels
The Reorder point is calculated as the Lead time Days plus Safety stock Days.
The Order up to level is calculated as the Lead time Days plus Safety stock Days plus Replenishment cycle Days.
Converting ideal levels days to units
The Reorder point and Order up to values are converted to units by looking at the item’s forecast. For example, if an item has an Order up to level of 140 days, and is entering peak season with a forecast to sell 9 units per month, then the Order up to level of 140 days, will convert to 42 units. Alternatively, if the item is coming out of season and is forecasted to sell 4 units per month, then the Order up to value of 140 days, will convert to 19 units.
However, it is important to note that the item may have multiple demand streams. The item’s Sales forecast will be based on how it sells in its own right at its particular location, however, a Distribution forecast and/or BOM forecast may be included into the items Total forecast.
Distribution forecast and BOM forecast can be interrogated lower down on the product Inquiry screen on the CW and BOM tabs respectively.
Determine the Net stock position
The Net stock units is not necessarily equal to the Stock on hand units. Net stock is calculated as the Stock on hand minus any Back orders or Allocated stock plus any Stock on order.
Available stock = Stock on hand - Back orders - Allocated stock
Net stock = Available stock + On order
TIP: The only time Net stock units will equal Stock on hand units is if there are no Back orders, Allocated stock or Stock on order for the item in question.
Back orders and Stock on order can be interrogated lower down on the product Inquiry screen by reviewing the Sales Orders and Purchase Orders tabs respectively.
Calculate the ideal order and factor in constraints
For Stocked items, the Ideal order quantity can be calculated as follows:
IF Net Stock units < Reorder point units THEN Recommended order units = Order up to units minus Net Stock units
IF Net Stock units > Reorder point units THEN Recommended order units = 0
An order will only be calculated when the Net stock units falls below the Reorder point units. In the example above, if Net stock was higher than the Reorder point, no order would be proposed. But as the Net stock units of 12 falls below the Reorder point units of 42, an Ideal order quantity of 30 has been calculated (42 minus 12).
Due to this some items having some supplier constraints such as Minimum order quantity (MOQ) or/and an Order multiple (OM), the Recommended order could be rounded to the relevant unit. For example, if a Minimum order quantity is 100 and an Ideal order was computed to be 98, that Recommended order will round up to 100 units. On the other hand, if an ideal order was computed to be 129 thus exceeding the Minimum order quantity of 100, but the Order multiple is 50, the Recommended order will then be 150 units. If minimum order quantities and order multiples are applicable, the information will be found under the Order Recommendation panel.
Ordering for non-stocked and obsolete items
For Non-stocked items, the Recommended order calculation does not use Reorder points or the Order up to level. A Recommended order quantity is only generated if the Net stock units drop below zero. The Recommended order quantity is calculated to bring Net Stock back to zero. The goal for Non-stocked items is to have a Net stock position of zero. However, Minimum order quantities and Order multiples may result in positive Net stock.
Obsolete items will never have Recommended order quantities calculated, regardless of the Reorder point, Order up to level and Net stock units.
Conclusion
Once the variables involved in calculating the Recommended order quantity have been interrogated and possibly corrected, you will no doubt feel more comfortable with the proposed Recommended order quantity. If you still believe it to be wrong, please don’t hesitate to communicate your concerns to a Netstock support consultant.
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