The Recommended order quantity is calculated as the Order up to level minus Net stock if the Net stock falls below the Reorder point.
“But what is this Order up to level and Reorder point?”
These are ordering levels and they are distinctly different from stock levels.
Below is a saw-tooth diagram illustrating the ideal Minimum (SS) and Maximum stock (SS + RC) levels.
The app doesn’t plan to have the stock value dip below the safety stock (SS) value. In an ideal world, stock will be consumed until it is equal to the safety stock value, at which point the next order will arrive, on time and in-full, taking the stock level up to the maximum level, which is safety stock plus replenishment cycle (RC).
Refer to What is a Replenishment cycle? for more information on why to order a replenishment cycle’s worth of stock.
The Min level and Max level in the illustration above are ideal stock levels, not ordering levels. Ordering levels need to factor in the timing of when an order needs to be placed. If we wish to have an item receipted on a certain date, we can’t place the order for that item on that same date. We have to place the order before the date we wish to receive the order. How far in advance do we place the order? A lead time (LT) before we wish to receive it.
Refer to How do the lead time units get computed? for the definition of lead time.
This brings us to the first ordering level - the Reorder point (SS + LT).
The Reorder point is equal to the safety stock (which the stock does not plan to dip below) plus the stock that is required to last us a lead time until the next order arrives.
The app will only calculate a Recommended order quantity when the Net stock is equal to or below the Reorder point. If the Net stock is above the Reorder point, it means that there is still enough and that an order does not need to be placed - yet. Placing an order when the Net stock is above the Reorder point could result in unnecessary excess.
Once the Net stock is equal to or below the Reorder point, the app will suggest an order. For how much? A replenishment cycle’s (RC) worth.
This brings us to our second ordering level, the Order up to level (SS + LT + RC).
The app will recommend an order to take the Net stock to the Order up to level. Meaning, the Recommended order quantity will be equal to the Order up to level minus Net stock.
In the illustration above, we can see that the Order up to level is higher than the maximum level. This will not result in excess, as the lead time (LT) element of the Order up to level would have been consumed in a lead time from now when the order is due to arrive, thus putting our Net stock equal to the maximum level (SS + RC).
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