SME: John Panayotou & Mark Whiteacre
By now you should have a good understanding of how to interpret the Projection tab and the Recommended order calculation on the Inquiry screen. If not, refer to these two articles before proceeding:
Picture this scenario: You are viewing the Inquiry screen for item C001 and notice it has a calculated Recommended order quantity (ROQ) of zero units. You navigate to the Orders screen and create an Order schedule against the supplier of that item. To your surprise, item C001 comes up on the Order schedule with a Recommended order quantity of 210 units. You drill down into the item Inquiry screen, thinking you have gone mad. The item Inquiry screen still shows a calculated ROQ of zero. What happened?
Firstly, it is important to note that today’s ROQ on the Order schedule (with a Look forward value of 1 day) and today’s ROQ on the Projection tab will always match. The ROQ on the Inquiry screen, however, will only match the ROQ on the Projection tab (and thus today’s Order schedule) if the following 2 conditions are met:
Any and all open Purchase orders are due to arrive within a lead time.
The Backorder ratio is set to 100%
Purchase orders within a lead time
The Projection tab and Order schedule only considers open Purchase orders due to arrive within a lead time whereas the ROQ calculation on the Inquiry screen considers ALL open Purchase orders, even those scheduled to arrive in a year’s time.
In the example below, our item has a lead time of 7 days. It is at risk of potentially stocking out, yet it has a ROQ of zero. Why?
Because its Net stock is higher than the Reorder point because of all the open Purchase orders. These Purchase orders are due to arrive long after it’s needed though.
Luckily, the Projection tab, and thus the Order schedule, has picked up that another order needs to be placed today to arrive in 7 days time and mitigate our risk of stocking out.
The reason the Projection tab only considers open purchase orders within the lead time is so that it can calculate how much additional stock to order now to ensure an OK stock status a lead time from now. The orders arriving outside of a lead time are, in simple terms, useless to me, as I require stock now.
Question: Why would open Purchase orders be arriving outside of a lead time?
Answer: Almost 90% of the time this is related to incorrect data being received from the ERP system. Perhaps the open Purchase orders aren’t “actually” open anymore and the data needs to be cleaned up in the ERP system. Perhaps specifying a lead time of 7 days for this item is incorrect as the “actual” lead time of this item is closer to 60 days. Scrutinize the purchase order history and open purchase order data to identify the cause of this.
Backorder ratio
The ROQ on the Inquiry screen will also differ from that of the Projection tab if the back-order ratio is not set to 100%.
Backorder ratio or Backorder percentage refers to the percentage of demand that will carry over if the opening stock or projected closing stock in the lead time is zero or negative. In other words, when you’ve stocked out, what percentage of the time will a customer either place a backorder or wait until you are back in stock?
The ROQ calculation on the Inquiry screen assumes a 100% Backorder ratio. In the real world, we know this may not be the case and that customers may go elsewhere for the product should you not have stock available. Hence, setting a Backorder ratio of 50% may be more accurate.
In this case, the ROQ on the Inquiry screen may be higher than that on the Projection tab, because the Projection tab knows to only account for 50% of customers to return for the item, whereas the ROQ on the Inquiry screen assumes 100% will return.