ILMA Compoundings October 2017 - 38

product numbers and quantities from
being entered into the system. Before
you try to use a reorder point as your
indicator to make or buy more inventory, make sure that you know what
you have on hand.

Reorder Point
Using the reorder point methodology
is the simplest way to manage inventory, but it can contain some subtle
complexities. The terminology can be
confusing. "Reorder point" and "safety
stock" are two different terms in managing inventory, but they very often get
used interchangeably. The reorder point
is the level of on-hand inventory that
prompts for replenishment of stock.
Safety stock is the minimum level of
inventory that is always on hand. Think
of safety stock as your backup for not
setting the reorder point correctly.

QTY. - Drums

Inventory
5

15
7

DAY DAY DAY DAY DAY DAY DAY DAY DAY DAY DAY DAY DAY DAY DAY DAY DAY DAY
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18

DAYS

Setting the proper reorder point
can be a powerful and simple way to
manage your inventory. An alert or the
review of a report can indicate that the
available quantity has dropped below
the reorder point. This initiates either
a purchase or the production of the
product. This is the simplest and most
straightforward way to manage your
inventory, but it does require a constant
review of the reorder points to ensure
that there isn't too much inventory being carried or too many purchase orders
or batch tickets being processed.
If the reorder point for a product
is never being reached, that is an

OCTOBER 2017

| COMPOUNDINGS | ILMA.ORG

indicator that you have too much
inventory, and it could mean that you
have obsolete inventory. If a product
is constantly appearing on the reorder
report, then the order quantity needs
to be increased.
To optimize the reorder point, the
lead time and maximum order quantity
are important variables to consider.
For example: if usage is two drums per
day, lead time is four days, safety stock
is three drums and order frequency is
twice a month or every 10 days, then
you need to set the reorder point at 11
and the order quantity at 20.
Obviously, the real world isn't this
neat and tidy. Usage is not a straight
line and forecasting can be difficult, so
to protect against insufficient inventory,
reorder points tend to be inflated. For
items that are made to order, setting
the reorder point at zero initiates the
alerts when the available inventory
goes negative. The reorder point system
of managing inventory can be very
effective, but it does rely on manually
setting and calculating values, whereas
material requirements planning systems
use your existing data to automate the
replenishment of inventory.

Materials Requirements
Planning
Materials requirements planning
(MRP) has been around a long time.
The concept is simple: forecast what
you are going to sell in the future;
calculate what you will need to make
in order to meet the sales forecast; and
calculate what you need to purchase
in your supply chain to match the
production schedule.
Utilizing MRP for planning, production and sourcing was originally
designed to work for manufacturers that
have either large runs (i.e., high volumes of similar products) or just a few
products. These products have relatively
predictable demand curves and little
variation in production requirements.
Lubricant manufacturers have some
products that fall into this category.

However, they also have a lot of
products for which it is difficult to
plan production because order quantities change frequently and there is a
variety of items manufactured. While
the concept is straightforward the execution can be complicated, because so
much of traditional MRP is based off
the forecast. If the forecast is correct,
then MRP will work flawlessly. That's
not the real world. So much of the
lubricant manufacturers' value to their
customers is their service. This necessitates an MRP system that is flexible,
enabling sudden reaction to changes
in demand. Best-in-class MRP systems
allow dynamic overrides to smooth
out the impact of shifts in the forecast.
There are two challenges to implementing MRP. First, to be set up properly MRP systems have traditionally
required a lot of data. Second, MRP
often ignores capacity constraints
unless specifically defined. For each
product, the replenishment rules need
to be defined properly. Fortunately,
MRP systems today use a company's
past buying and production history to
determine the replenishment rules for
each product. This makes a plan easier
to deploy and addresses one of the
major shortcomings of MRP by using
your past purchase or production
amounts to limit the recommended
planned order. If the MRP calculated that 6,000 pounds is required to
fulfill demand, the new methodologies
would determine that, historically,
3,000-pound batches are made. The
MRP would create two planned
orders of 3,000 pounds instead of one
6,000-pound batch.
MRP also considers lead times for
each product made or purchased and
creates an action list of the releases of
planned orders that need to be done to
ensure that there isn't an interruption
in the manufacturing process. By analyzing the transaction patterns within
the system, the MRP can better recommend what to make and buy without
extensive setup, making it easier to use.

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ILMA Compoundings October 2017

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