SCM: Calculation of order size
The manager's mission stocks of the trading company — to provide existence of goods in a warehouse. Existence or lack of goods is more strict it is possible to express through "availability level" (AL). If 100 clients addressed on a warehouse and all received the orders fully completed, % UD=100. If one client did not receive the order because of the shortage of goods, UD falls up to 99%. When choosing strategy it is important to understand desirable UD: absolute is attractive to clients, but roads for the company (most likely, it is necessary to hold the overestimated stock); fifty-percentage to support much cheaper, but it can cause discontent of clients, though not always. Determination of desirable level of availability — a creativity element in work. It is clear, that UD should be defined for each goods individually. Less expensive option assumes splitting the range into several groups (for example, using ABC analysis) and assignment to goods of group level of availability.
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Structure of replenishment action
Having set UD, it is possible to pass to the next stage — the answer to two main questions: whether it is time to resupply and if yes, what should be order size? Basis of many calculations in logistics is goods turnover: the volume of products which passed through a warehouse (shop, retail chain stores) for some time. In our case the speech can go about goods turnover on shipment of a warehouse, i.e. about sales. The concept of goods turnover assumes a certain time frame for which a quantity of products is shipped. At everyday calculations of need for goods it is logical to measure sales in a day, but, considering possible jumps in values of day sales, it is more correct to use mean value of sales in day, for example in a week or in ten days — the period is selected depending on specifics of business and is system tuning element. Speaking more specifically, it is convenient to use a formula of moving average for rather small period: a system will be less sensitive to accidental jumps in demand and at the same time will react to short-term trends of the shift in demand.
We move further. Any averaging comprises slyness — now we will not distinguish accidental large sale from a stable flow of small shipments. The statistical device gives us an opportunity of department using standard deviation. Single sale will have a considerable deviation, stable sales of such deviation will not have. Important variable formula the term of reaction of the supplier as which we will understand a time frame between the moment of emergence of need for goods till the moment when the goods become available to sale is (for example, on it the price list is created). The term of reaction consists of information exchange term with the supplier, a payment due date, delivery date, term of customs clearance, term of warehouse transactions, etc. It is important to understand that in most cases the term of reaction is not equal to delivery date at all, and it is more than it. The term of reaction can be defined in relation to the specific supplier, either to the supplier — goods pair, or to specific goods. Certainly, data on the term of reaction should be fixed in an information system. In the simplest case — it is the expert evaluation of the specialist specified in a goods card. A preferable format — "average term of delivery" and "delta" — possible deviations. For example, reaction term for goods "A" is equal to 10 days +/-2 days. More difficult algorithms allow to estimate the actual terms of reaction and to define mean values, for example comparing date of sending the supplier order and date of goods receipt in a warehouse. Here the same average term of delivery (for example, for the last 5 deliveries) and possible deviations will be a final result. Deviations in terms of reaction are defined similar to instability of goods turnover: we need to consider possible instability of delivery dates. The it is higher, the bigger buffer in the form of an additional stock should be stored in a warehouse. We use a formula of standard deviation. There can sometimes be a situation at which it is time to order goods, but it is not done because of the expected delivery, i.e. the goods are already ordered and "go". The situation is quite clear, however it should be distinguished from option of succession of events at which deficit of goods will arise after arrival of the batch ordered earlier. So the order should be placed already now, without waiting for arrival of the batch ordered earlier. Physically accounting of the ordered goods organize formation of the conditional ("virtual") warehouse "goods in way" on which goods items are credited when receiving order confirmation from the supplier and from which goods items are written off at revenues to a real warehouse.
Inventory level
The simplest management systems for a stock assume elementary comparison of the set level of a stock remainder with actual. At the same time the set inventory level (sometimes it is called not reduced inventory level) can be defined ekspertno or be calculated by any technique (for example, the stock should last for 2 months of trade). It is obvious that the system created by us also should consider the set inventory level, however do it more gracefully. The competent name of not reduced inventory level — a safety trade inventory. I will remind that it is necessary for compensation of possible deviations in demand and in terms of reaction of the supplier. If the supply chain guarantees lack of like those deviations, the company can work without safety trade inventory, and the strategy of management is called in this case by "Just-in-Time". For correct calculation of the size of a safety trade inventory it is necessary to estimate quantitatively deviations in demand and in reaction terms what we already spoke about. But an opportunity to estimate the required size of a safety stock not on once to the approved values is still interesting, and considering the newest changes of a situation: in case of stable improvement of parameters of delivery and alignment of demand the safety stock should decrease. Fairly and the return: with a growth of instability of deliveries the safety stock should be increased. Thus, the size of a safety trade inventory should be calculated every time again for each position. In this case a system will consider last modifications in a situation that, undoubtedly, is competitive advantage for the company. Formulas for calculation of a safety trade inventory exists much, and the choice of the most correct is integrated to certain difficulties: any of them is not deprived of defects. However, including "a good formula" acceptable option, it is possible to use formula 1.1. Coefficient of "k" — in this case the return value of standard normal distribution having functional dependence from goods availability level. More detailed and mathematically correct explanation can be received in any textbook according to the statistics, to us for work will be enough data provided in Table 1. I will repeat, use of value of standard normal distribution is serious simplification in terms of mathematical statistics, however, on deep belief of the author, this approach is quite justified in logistic calculations.
Data on positions
The list of the data required on each goods item is included below: 1. Required level of availability to a goods item or for group which possesses this goods item. 2. For determination of parameter of "sale in day" it is necessary to be set by a time frame for which mean value is considered. The interval can separately be set on a goods item for group to which this goods item belongs. 3. For determination of the Term of Reaction of the Supplier parameter it is necessary to fix in an information system on each delivery the moment of formation of need for goods and the goods receipt moment in the receiver's warehouse — by each goods item. 4. It is necessary to fix data on the goods which are en route from the supplier in an information system. 5. Certainly, the settlement module should "know" a commodity remaining balance for settlement date.
See Also
Source
Alexander Kirikeza, the business coach ITC Group/ITC Groups for the IT SPECIALIST
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