FIACCT 08-06_00 Inventory – Inventory Control – Reorder Point Process/Set-Up Process

Effective: March 16, 1998
Revised:
Reviewed:

Purpose

This policy describes the inventory control policies and procedures for performing reorder point calculations and set up processes.

Background

To support the operations of the agency, it is necessary to establish an agency-defined level of service. The reorder point is the level which defines when commodities should be purchased to provide the required service. Only those items which reach the reorder level will appear on the Replenishment Review Report (IN90). This report incorporates the safety stock levels, the requisition and delivery lead times, the ABC parameters, the ABC lead time adjustments, the forecasted demand, and the designated ordering method. (NOTE: For detailed information about replenishment of inventory items, refer to the Inventory Control Replenishment Procedure.)

Policy

The reorder point level and reorder quantity are calculated by the Reorder Point Calculation program that is run at the first of each month. [NOTE: FINET has the capability of using the Order Up to Amount or the Economic Order Quantity (EOQ) method of inventory ordering. If the EOQ method is used, the Reorder Quantity program calculates the reorder level and the reorder quantity.]

Procedures

Responsibility

Action

Executive Management

Determine the inventory ordering method to be used by the agency. Either the Economic Order Quantity method or the Order Up To Amount method can be used. For information on these two methods, contact the Inventory Control Agency Representative or refer to inventory control management books.
Determine the level of service to be provided to the consumer. The safety stock factor is directly related to the level of service provided. The system will allow a safety stock factor from 0 to 4.0. The following table provides information about this relationship:

Level of Service
50.00%
78.81%
84.13%
94.52%
97.72%
99.18%
99.87%

Safety Stock Factor
0.00
1.00
1.25
2.00
2.50
3.00
3.75

3. The safety stock level serves as a buffer for fluctuations in demand. The amount of safety stock maintained is determined by the desired level of service. In other words, the fewer stockouts desired, the higher the safety stock.

The safety stock is calculated as follows:

SS = SSF × MAD
Where SS = Safety Stock
SSF = Safety Stock Factor (This is a parameter defined in the ABCP Table)
MAD = Mean absolute deviation (calculated as the average monthly absolute value deviation of forecasted demand from actual demand for each of the past 12 periods).

System Maintained

At the end of each month, the lead time calculation program is run and calculates lead times as follows:

a. The requisition lead time is established by the system from previous orders. For purchases made from vendors it is the difference from the date the requisition is entered to the date the purchase order is entered. For items that are transferred, the requisition lead time is calculated as the date the Transfer Request is entered to the date the Confirmation Issue is entered.

b. Vendor lead time is established by the system from previous orders. For purchases made from vendors, it is the difference from the date the purchase order is entered to the date the purchase order Receiver is entered. For items that are transferred, the vendor lead time is calculated as the date the Transfer Issue is entered to the date the Transfer Receipt is entered.

Inventory Control

There are three methods in the inventory control system to forecast demand as follows:

a. Manual – Defined as the ability of inventory managers to set the forecast levels as they determine necessary. This is maintained on the Inventory Inquiry (INVNA) table, and is performed manually for each item. It will affect the reorder amount calculations and related reports. (NOTE: Other methods for loading data, such as establishing a database in a PC and downloading information, then calculating forecast levels then uploading the information can be used.)

b. Non-Seasonal – Defined as the moving monthly average of the actual demand in the previous stipulated months. The number of previous months to be used in the calculations is specified in the ABCP Table. The actual demand history is retrieved from the INVNQ table.

c. Seasonal – Defined as the method of forecasting to consider usage that fluctuates throughout the year. This seasonal factor is the ratio of the usage for a given month versus the total usage for the year. Once this calculation is applied, months with higher usage during the previous year(s) will cause the reorder level to increase during those months, while months with lower usage will cause reorder levels to decrease during those months. This calculation must consider a minimum of 12 months and can consider a maximum of 24 months.
The reorder level is the point at which reorder consideration should occur and is the focus of some reports, including the Inventory Management Report (IN40) and the Replenishment Review Report (IN90 in Data Warehouse). Reorder level is determined primarily by forecasted demand, average order lead time, and safety stock requirements. The calculation is:

RL = (AU × ALT) + SS

Where:

RL = Reorder Level
AU = Average Usage in Days (forecast ÷ 30)
ALT = Average Lead Time in Days (from INVNQ Table)
SS = Safety Stock (from INVNQ Table)