Configuration of Replenishment: Example of Parameter Calculation

The following example illustrates the calculation of replenishment parameters based on three months of historical sales data.

Company Story

Suppose that on March 1, the ABC company first purchased a new gadget for bikers (the New Gadget stock item) and sold it to a local sporting goods store, Best Sports. Best Sports decided to order 200 units during April and May.

ABC's purchasing manager, who is responsible for sales of the New Gadget item, has checked the item's settings on the Stock Items (IN202500) form. On the Inventory Planning tab, the manager has specified the following replenishment parameters during these three months of sales:

  • Safety Stock: 20
  • Reorder Point: 50
  • Max Quantity: 200

Before extending the sales to other customers, the purchasing manager has decided to collect the relevant sales data during the first three months and then calculate the replenishment parameters based on this data by using the following settings on the Stock Items form:

  • Forecast Type: Month
  • Periods to Analyze: 3
  • Launch Date: March 1

Timeline of Events

The purchasing manager tracks the events related to New Gadget and collects the data as follows.

Table 1. Timeline of Purchasing, Receiving, and Replenishing New Gadget
Business Date Event Form
March
March 1 ABC configures replenishment for New Gadget. Multiple forms. For details, see Configuration of Replenishment: General Information.
March 1 A purchase order for 200 units of New Gadget is created, approved, and sent to the Best Gadgets vendor. Purchase Orders (PO301000)
March 15 The Best Sports store places a sales order for 200 units. Sales Orders (SO301000)
March 21 ABC receives 200 units of New Gadget. A purchase receipt for 200 units is released. Purchase Receipts (PO302000)
March 22 A shipment to the Best Sports store is confirmed. Shipments (SO302000)
March 31

ABC collects the data:

  • Total sales: 200 units
  • Daily demand: 200 / 31 = 6.45
  • Lead time: 20 days
 Offline event
April
April 1 ABC prepares replenishment for New Gadget. Prepare Replenishment (IN508000)
April 1 A purchase order for 200 units of New Gadget is created, approved, and sent to the New Gadget vendor. Purchase Orders
April 15 The Best Sports store places a sales order for 200 units of New Gadget. Sales Orders
April 18 ABC receives 200 units of New Gadget. A purchase receipt for 200 units is created and then released. Purchase Receipts
April 22 A shipment to Best Sports is confirmed. Shipments
April 30

ABC collects the data:

  • Total sales: 200 units
  • Daily demand: 200 / 30 = 6.67
  • Lead time: 17 days
 Offline event
May
May 1 ABC prepares replenishment for New Gadget. Prepare Replenishment
May 1 A purchase order for 200 units of New Gadget is created, approved, and sent to the Best Gadgets vendor. Purchase Orders
May 15 ABC receives 200 units of New Gadget. A purchase receipt for 200 units is created and released. Sales Orders
May 15 Best Sports places a sales order for 200 units. Purchase Receipts
May 22 A shipment to Best Sports is confirmed. Shipments
May 31

ABC collects the data:

  • Total sales: 200 units
  • Daily demand: 200 / 31 = 6.45
  • Lead time: 14 days
 Offline event
June
June 1 ABC uses the collected data to calculate the replenishment parameters, as described in the following section. Calculate Replenishment Parameters (IN508500)

Calculation of Replenishment Parameters

On June 1, the purchasing manager initiates the calculation of replenishment parameters by using the Calculate Replenishment Parameters (IN508500) form. The service level for the New Gadget stock item is specified as 90%.

The system calculates the replenishment parameters as follows.

Parameter Suggested Values Calculation Comment
Average Daily Demand 6.52 (200 + 200 + 200) / (31 + 30 + 31) The value is calculated according to the formula. For details, see Configuration of Replenishment: Demand Forecast Model.
Lead Time STDEV 0.10 STDEV(200 / 31, 200 / 30, 200 / 31) Standard deviation of the lead time (in days) from the average value
Lead Time Average 17 (20 + 17 + 14 ) / 3 Item Warehouse Details (IN204500) form
STDEV 2.45 STDEV(20, 17, 14) Lead time for standard deviation of purchases
Service Level 90% The value is copied from the item on the Stock Items (IN202500) form
Normsinv (Service Level) 1.28 The value is calculated according to the formula. For details, see Configuration of Replenishment: Demand Forecast Model.
Safety Stock 20.6 1.28 * SQRT((17 * 0.1) ^ 2 + (6.52 * 2.45) ^ 2) The value is copied from the item on the Stock Items form.
Reorder Point 131.49 (17 * 6.52 + 20.6) The value is copied from the item on the Stock Items form.
Max. Quantity 131.49 The value is copied from the item on the Stock Items form.

As this simple example shows, the reorder point should be increased to 131 units, mostly because of a rather large average lead time.