# Inventory planning module

Important

This module is only available in the Enterprise Edition.

This module allows the calculation of the optimized reorder quantities and safety stocks for all buffers. This is an important aspect of your planning process, as safety stocks are required to:

• Safety stocks are required to meet the expected service level of your customers.
When customer delivery times are shorter than the production or purchasing lead times, inventories are required to cover the expected demand over the lead time and its variability.
• Safety stocks covers for variability on the supply side.
Supplier purchasing lead times and manufacturing times have a level of variability that needs to be planned for to support a smooth progress of all activities.

This module computes these safety stock and reorder quantities, which are then used by the planning algorithm to generate matching replenishment plans.

The module offers the following functionality to compute these values. In the distribution planning screen these parameters are shown to the user as follows:

## Calculation of the reorder quantity

The reorder quantity represents the quantity of material to be purchased per purchase order.

We provide three different ways to compute it. In the distribution planning screen the planner has the capability to override the value computed by the system for specific time periods.

• Economic order quantity

A reorder quantity can be computed that finds the best compromise between the cost of carrying inventory and the handling cost associated with each purchase order.

See https://en.wikipedia.org/wiki/Economic_order_quantity for the background.

The parameter inventoryplanning.fixed_order_cost defines the cost of processing an order. The parameter inventoryplanning.holding_cost define the percentage of the item cost involved in storing the material for one year in your warehouse.

Since the forecast varies by period, the economic order quantity will be computed seperately for each period in the planning horizon.

• Fixed quantity

This freezes the reorder quantity to a fixed value for all time periods. This can be useful eg when you order a pallet or a container at a time.

• Period of cover

Using this method the reorder quantity is computed to cover the expected demand for the specified time fence.

Since the demand varies over time, the reorder quantity will also vary for each period in the planning horizon.

## Calculation of the safety stock

The safety stock is the lowest point below which we don’t plan the inventory to drop. It is the moment right before we expect the next replenishment to come in.

The safety stock is related to the reorder point with the relation:

reorder point = safety stock + demand during the replenishment lead time

We provide three different ways to compute the safety stock. In the distribution planning screen the planner has the capability to override the value computed by the system for specific time periods.

• Service level

The module can compute the safety stock required to obtain a certain service level.

The calculation is based on the following data elements:

• Target service level

Obviously, higher service level require a higher safety stock level.

• Statistical distribution applicable to the demand

In most case you can leave it to the system to choose automatically between a Gaussian (or Normal), Poisson or Negative Binomial distribution type. The automatic selection logic is based on the forecast value and the demand deviation.

• Standard deviation of the demand history.

Spiky and irregular demands patterns require a higher safety stock level to reach the same service level.

FrePPLe computes this standard deviation from the demand history, but a planner can override this value.

• Standard deviation of the lead time

Similar to demand variability, also variability in the replenishment lead times result in higher safety stock levels. The more unreliable the supply, the higher the safety stock required to reach a given service level.

• Fixed quantity

This set a safety stock at a fixed value for all time periods. This can be useful eg when you order a pallet or a container at a time.

• Period of cover

Using this method the safety stock is computed as the expected average demand over a specified time fence.

Since the demand varies over time, the safety stock will also vary for each period in the planning horizon.

## Don’t stock flag

As a special case users can flag certain item-locations to be non-stockable. The safety stock is then set to 0, and the reorder quantity is set to 1.

Note that this flag does NOT mean the item can’t have any demand. If there is demand on a buffer with this flag set, we will create a replenishment plan where each demand has a matching supply of the same quantity on the same day.

## Maintenance of inventory planning parameters

For editing the parameters of a single item location, the distribution planning screen is the most appropriate screen. When a parameter is changed you can recalculate on-the-fly the forecast, inventory plan and the resulting replenishment transactions.