Effective Replenishment Parameters, Part 1:  Anticipated Lead Time & The Replenishment Position

The Anticipated Lead Time

The anticipated lead time is the sum of four factors:

• The time it takes you to place an order

• The time it takes the vendor to process your order and ship the material

• The time it takes for the material to travel from the vendor to your warehouse

• The time it takes you to receive, unpack, and prepare the stock receipt for sale or use

A common method of calculating the “average” lead time is to average the lead times associated with several previous stock receipts of a product. We have found three major problems with this technique:

• Half of the actual lead times will be less than the average, increasing the possibility of a stockout of the product.

• If the anticipated lead time dramatically changes, it will take a while for the average to “catch up” to the new actual lead time for the item.

• The calculated average may not take into account all four elements of the lead time. For example, the lead time may be recorded before a shipment is inspected and the material is available for sale or use.

We suggest that anticipated lead times be manually maintained by a buyer and set to the longest normally anticipated lead time for a product. If actual lead times for an item range from one to two weeks, set the lead time equal to 14 days. If actual lead times for a product range from two to four weeks, set the anticipated lead time equal to 28 days.  While this method may slightly increase your overall inventory investment it will greatly reduce annoying instances of stockouts of critical products.

The Replenishment Position

Notice in the diagram on page 1 that the stock level is referred to as the “replenishment position.” Is the replenishment position the actual quantity on the shelf? Maybe, maybe not. The replenishment position is equal to:

On-hand qty – Qty committed on current outgoing orders + Qty on current replenishment orders

If a customer is on his way to your warehouse to pick up two pieces, they should be committed to that customer. We want to subtract that quantity from the on-hand quantity in determining when to reorder the product.  After all, what would happen if someone called and ordered six pieces to be picked up in six days? Would we want to wait to reorder the product until the customer order was picked up and there were none left on the shelf? Of course not. To maintain a high level of customer service it is important to know when the “available quantity” (on-hand quantity – committed quantity) reaches or falls below the minimum quantity.

But what if we order more of the product today? Because it takes six days to receive a replenishment shipment, the available quantity will still be below the minimum quantity tomorrow. Do we want to order more of the product?  Probably not. If a replenishment shipment is already on order, we don’t need to order more. This is why the quantity on current replenishment orders is added to the on-hand quantity to equal the replenishment position.

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