Most computer ERP (enterprise resource planning) software packages replenish inventory with minimum and maximum quantities or reorder points and reorder quantities. The forecast, a prediction of what you are going to sell or use in the future, is an integral element of both reorder point and reorder quantity formulas:
Reorder Point = (Forecast/Day * Anticipated Lead Time) + (Forecast/Day * Order Cycle) + Safety Stock
Reorder Quantity is often determined by the Economic Order Quantity (EOQ) or a number of month’s supply:
EOQ =
Square Root of [(24* Cost of Reordering * Forecast/Month)/(Carrying Cost % * Unit Cost)
Month’s Supply = Forecast/Month * Desired Number of Month’s Supply to Stock
Unfortunately, most replenishment software systems utilize a forecast of future demand for the current month in all replenishment calculations. The current month’s forecast works well if you experience short lead times, that is, you can get delivery from your suppliers in a week or two.
However, products with extended lead times (i.e., greater than 21 days) require a more dynamic replenishment method. For example, if you are importing material and experience a 120 day lead time, a forecast for the current month is not meaningful. You need a forecast of what demand for products will be four months from now (when a replenishment order placed today will arrive). Systems that project needs into the future are called distribution requirements planning or DRP packages. Various software providers have different features in their DRP modules, but a good DRP system will have the following characteristics:
- Calculate a separate demand forecast for each of the upcoming nine to 12 months (or inventory periods such as weeks within the upcoming nine to 12 months)
- Calculate a separate safety stock quantity for each inventory period within the upcoming nine to 12 months. Safety stock provides protection from stock outs against unusual sales or delays in receiving replenishment shipments.
- Project when, during the upcoming nine to 12 months, you will need to receive inventory to meet the demand forecast and maintain adequate safety stock.
- Determine when replenishment orders for needed stock receipts should be issued to the supplier.
- Project when, during the upcoming nine to 12 months, you may have excess inventory (prompting you to try to cancel or delay scheduled replenishment shipments)
A DRP replenishment system allows you to project your needs of products with extended lead times up to 12 months into the future. Buying reports of DRP systems will express what needs to be ordered each month in pieces, dollars, weight and cubic volume. These last two measurements allow buyers to ensure that they are ordering what will fill a container. DRP systems can also provide financial managers with a long-range view of cash requirements needed to fund future purchases.
A good DRP system is a crucial asset for those distributors who import products. If your system does not include DRP replenishment, consider implementing a “bolt-on” software solution that has these capabilities. It will be of tremendous value as you strive to achieve effective inventory management.