MRP: Reorder Points versus Lead Times

With the introduction of manufacturing capabilities added to CAPITAL Business Manager in the next release, this topic discusses some conceptual differences between traditional reorder points versus lead times, for restocking inventory.

A typical business that carries stock will (most of the time) work off a reorder point. When carry levels drop below the reorder point, this triggers the system to order more stock. A reorder that has been specified correctly, should take into account safety stock levels and some sort of estimate of sales over the period where stock has dropped below the reorder requirement.

Let’s say your reorder point is 45 units and your max stock level is 100. And you reorder this item when it drops below the reorder point. What we generally don’t think about, but which is a factor which goes into determining the reorder point, is the supplier lead time. If we know this supplier takes 7 days to process an order and ship goods to you, a reorder point of 45 is really coverage for 7 days plus whatever safety buffer you want to add to that. That might mean you’re selling 40 units a week and you’re carrying an extra 5 for safety in case you get an order that is greater than 40 over that week or it takes you an extra day or so longer to raise your PO.

The point of this explanation, which will be obvious to some, is to highlight the role of the lead time in the above scenario. Although its role is not necessarily explicit.

Given the above (typical) process for inventory management, many or most users will take the lead time into account when setting up their reorder points and this usually gets the job done, so they may not bother to also specify on the stock record what the actual lead time is, i.e., 7 days.

MRP is different in this fairly important respect. The reorder process is not driven by reorder points, but by lead times. For MRP to work efficiently every item has to have a lead time on it. CAPITAL MRP will let you specify a global/default lead time if an item doesn’t have a lead time against it, but obviously that is not ideal. As the global lead time will generally try to cover all worst case scenarios, which means you will be ordering more stock and holding it longer, than would otherwise be necessary. In an ideal scenario you only want to hold the stock you will use in manufacturing for only a short period before it is consumed.

An MRP requirement is essentially based on these elements:

* Free Stock + Stock On Order (your base stock)
* Manufacturing requirement quantity
* Lead time

If your manufacturing requirements are greater than your Free Stock plus stock already ordered, then you need to order the difference (called the Short Fall) prior to the scheduled manufacture date. In CAPITAL this Short Fall, less what has already been ordered, is referred to as the Procurement quantity. (This is what gets placed as the order quantity on your purchase orders.)

While things are actually a little more complicated than this, for the sake of this discussion complicating factors need not be addressed here.

Therefore, if you’re asking the system to schedule when you can build an XYZ, the system needs to consider two core requirements:

1. When do I have the capacity to build it (i.e., available labour time)
2. When can I acquire those goods I can’t immediately draw from stock?

And in this case, the system is going to look at when there is capacity to make those goods, and then next, what is not in stock and what the lead times are for those missing components. Even if you can theoretically start manufacture next Wednesday, if the lead time on a particular component is 14 days, then the schedule date is going to push out to the week following next.

The moral of this story is that MRP is largely driven by lead times rather than reorder points. If you’re thinking about setting up MRP inside CAPITAL, you need to assess your raw material and component codes and establish and add missing lead times. These may never have been entered – or at least maintained – when your original inventory was first created.