Certain replenishment control values must be calculated for every item/warehouse combination in the system. There are three types of inventory control codes that provide you with the flexibility to define different methods for calculating forecast, economic order quantity (EOQ), reorder point (ROP) and safety stock level (SST). The calculation methods can be assigned to different segments of stock.
Each control code table handles different calculations used in managing inventory. They are:
|Work with forecast control codes||This table defines the method, values and parameters to be used in the forecast calculation.|
|Work with replenishment control codes||This table defines the method, values and parameters to be used in the calculation of EOQ.|
|Work with service control codes||This table defines the method, values and parameters to be used in the calculation of ROP and SST.|
|Work with purchase review control codes||This table defines the review criteria for purchase suggestion lines.|
The system performs all calculations on item/warehouse level. By connecting each item/warehouse combination in the Item file to a record from the control code tables, you tell the system how to calculate forecast, EOQ, ROP, and SST.
Each control code record can be connected to many items. If you wish, you can define one record (in each control code table) that is connected to all item/warehouse records in the system.
Control key classes
Each inventory control code must be connected to a control key class. The control key class represents a different way to group, or segment, the item/warehouse records in the system.
By grouping stock, you can assign different methods for calculating forecast, EOQ, ROP, and SST to each group. The available control key classes are:
|Item||The item class allows you to define inventory control methods on item level, i.e., for a single item.|
|Item group||The item group class allows you to de fine inventory control methods on the item group level, i.e., for a single item group.|
|Supplier number||The supplier number class allows you to define inventory control methods on the supplier level, i.e., for a single supplier.|
|Volume value code||The volume value class allows you to define inventory control methods on the volume value code level, i.e., for a single volume value code. Volume value classes are defined in the Volume value code table. For more information, see About working with inventory segmentation.|
|Movability code||The movability class allows you to define inventory control methods on the movability code level, i.e., for a single movability code. Movability codes are defined in the Movability code table. For more information, see About working with inventory segmentation.|
|Volume & movability||This class allows you to define inventory control methods on the combination of volume value code and movability code level.|
|Nickname||The nickname class makes it possible to make a completely optional connection between any item/warehouse records and an inventory control code table record. You can combine all the above listed criteria to define a segment of items that is connected to the same control code table record through the fast update function. The identity of the inventory control record will be an arbitrary name.|
|Default||The inventory control methods that you define in this class are used as defaults when no other inventory control code record is found for an item/warehouse combination.
It is mandatory that all item/warehouse records are connected to one inventory control code record, therefore the default record must always exist. During installation, you have the option of letting the system create a default record for each of the Inventory control code tables. The default methods established by the system are basic, commonly used ones. These can be changed.
You can create inventory control code records for one, many or all of the above classes. The class defines how you want to segment your stock.
Records in the inventory control code tables are identified by two keys. First they belong to one of the classes described above. Second, they must be identified by a key value, which can be:
- Item code for records of the item class
- Item group code for a record of the item group class
- Supplier number for records of the supplier class
- Volume value code for records of the volume value class
- Movability code for records of the movability code class
- A three position combined field of volume value code and movability code for records of the volume & movability class
- An arbitrary name for records of the nickname class
- A constant for the default class
As part of the key value key, you can also define a warehouse. By defining a warehouse, the entry you create applies only to that warehouse. By leaving the warehouse field blank, the entry you are defining applies to the entire company. This means that you can manage your stock at the warehouse level, or the company level, or a combination of both.
Forecast calculation methods
The available forecasting methods are:
|Exponential smoothing (with or without trend)||This method is an average of the demand in all previous periods, where the weight for a periods, demand decreases with time. This method uses the alpha value. See section Alpha value for more information.|
|Moving average||This method is an arithmetic average of a certain number of periods (n), where (n) = the number of forecast periods to use for the average. Unlike the exponential smoothing, this method gives equally as much weight to older forecast periods as to the most recent forecast periods.|
|Forecast copy||This method allows you to copy actual demand, including demand adjustment, from the corresponding forecast period in the previous year. It uses a (+ or -) percentage to modify the copied demand to reflect the expectations for this year.|
See About working with forecasts for more information about the forecast calculation methods.
The alpha value controls how quickly the forecast reacts to changes in demand. It is used in exponential smoothing, with or without trend analysis. A low alpha (0.01 - 0.10) makes the forecast react slowly to changes in demand and therefore produces a stable forecast. A high alpha (0.40 - 0.50) makes the forecast react quickly to changes in demand, risking an unstable forecast.
The Forecast control code table defines if the alpha value should be defined manually or automatically by the system.
Manual alpha value
You define the alpha value by completing the Alpha value field in the Forecast control code table. The defined alpha value will be used for every period.
The value of the alpha depends on the length of the forecast period. The following table can be used as a guideline when you define an alpha value manually. Look at the values for the forecast period length that you have established for your company:
|Forecast period length||Low value||Normal value||High value|
Automatic alpha value
If Auto alpha update is set to YES in the Forecast control code table, then the system automatically updates the alpha value when the inventory calculation is run. A new alpha value will be calculated for each forecast period and stored it in the Forecast file per item/warehouse and forecast period.
You can control how low and how high the automatic alpha value will be by completing the Minimum alpha and Maximum alpha fields. The minimum alpha must be in the range of 0.01 to 1.00, and the maximum alpha must be greater than the minimum alpha. Each time the system calculates a new alpha value, it checks that it is greater than the minimum alpha and less than the maximum alpha.
The system uses the forecast error information as input for the calculation of the new alpha value. If the forecast error is large, the system increases the alpha value to get a faster adjustment to true demand. When the forecast error is small, the system maintains a low alpha to keep a stable forecast that adjusts slowly to changes in demand.
The size of the forecast error is retrieved from the absolute value of the tracking signal. The tracking signal is close to zero when there is a small forecast error and close to 1 when there is a large forecast error.
Note: See About working with forecasts for information about the forecast error calculation.
EOQ calculation methods
The available EOQ (or replenishment) methods are:
See About economic order quantity (IBS Inventory Control) for more information.
The Wilson method seeks to minimise the total cost of replenishing stock. There are two cost components involved. These are the ordering cost which is the estimated total cost for placing one order line, and the stock carrying cost which is the cost of having capital tied up in stock.
Ordering cost and the cost of having stock on hand are inversely related. That is, to minimise ordering costs you will need to purchase large quantities per order, reducing the total number of orders. But by reducing ordering costs in this manner, you increase the number of stock you have on hand, and increase the cost of tied up capital.
The Wilson method finds the optimum balance between these two costs. It adds the cost components together and selects the quantity (EOQ) that gives the lowest total cost.
This method is based on a fairly smooth demand pattern and functions best under such circumstances.
The Period dependent method is a modified version of the Wilson method that handles large fluctuations in demand. The Wilson formula is applied to calculate the best quantity to purchase. Wilson minimises the cost over one year, by analysing the year forecast from the Item file.
In the Period dependent method, the Wilson quantity is related to the total year forecast to get a time slice of one year that should be covered with every Wilson purchase. From this, you know how many days' consumption per average over the year to buy.
The final step is to look in the Forecast file to see what the expected demand is for the number of days that we want to cover at this time. This means that when the near future forecast is higher than average, the Period dependent method will give a higher quantity than the Wilson method. If the near future forecast is lower than average, the Period dependent method will yield a lower quantity than the Wilson method.
The Demand control method does not try to minimise cost as in the previous two methods. Instead, an average monthly forecast is calculated from the year forecast in the Item file. Using the average monthly forecast, the quantity to purchase is calculated as the forecasted demand during a specified number of months.
ROP and SST calculation methods
The service calculation is aimed at calculating a ROP and SST based on a desired level of customer service. The available service methods:
See About reorder point and safety stock (IBS Inventory Control) for more information.
This is the theoretical method to calculate a statistical safety stock. It takes into account such factors as your service level, forecast uncertainty and lead time. The safety stock is based on the service level established in the Service control code table (at item/warehouse level), the length of the replenishment time, the size of the forecast error and the size of EOQ.
It will be high if you have long lead times, high uncertainty in your forecast, and high requested service level. It will be low if EOQ is high because a high EOQ means that you will maintain a high stock level. In this case, high EOQ acts as the buffer against unexpected demand that the safety stock would normally provide.
This method is used to set your safety stock. It is calculated as a specified percentage of the forecasted demand during lead time. It provides a simple way of calculating the safety stock.
Enquiries and printouts
- Forecast control code enquiry
- Replenishment control code enquiry
- Service control code enquiry
- Item file enquiry
- Purchase review control code enquiry
- Forecast control code printout
- Replenishment control code printout
- Service control code printout
- Purchase review control code printout
- Create a forecast control code
- Create a replenishment control code
- Create a service control code
- Create a purchase review control code
- Connect control codes to an item/warehouse
- About economic order quantity (IBS Inventory Control)
- Inventory control formulas
- About reorder point and safety stock (IBS Inventory Control)
- About working with forecasts
- About working with inventory calculations
- About working with inventory segmentation
- About IBS Inventory Control