Finished Goods Solutions
Optimise Service Levels/ Stockholding/ Procurement Costs
A finished goods solution varies according to the configuration of the ERP/ inventory management system:
- Replenishment driven by MRP forecast - set safety stocks to cover any forecast shortfall
- Replenishment by reorder level (no forecast) - set to cover requirements within lead time
1. Replenishment Driven by MRP Forecast
Where an item's demand forecast by stock location is loaded into a MRP system, a safety stock is set to cover any forecast shortfall error where the requirements exceed the forecast and shortages arise. (In the opposite case, where the forecast exceeds the requirements, a surplus arises: this element of the forecast error is excluded from any analysis.) This is shown in the graph below with the forecast shortfall also plotted separately:
Inventory Strategy Manager optimises the safety stocks to satisfy the forecast shortfall with respect to service levels and stockholding costs. In essence, items with a consistent, month-in-month-out forecast shortfall can be satisfied at a high service level (and infrequent expediting) with relatively low safety stocks. However, items with an infrequent forecast shortfall (and therefore well-forecasted anyway) may be better satisfied by a higher proportion of expediting as safety stock utilisation for high service levels might be poor.
2. Replenishment by Reorder Level (no forecast)
In this case, Inventory Strategy Manager analyses demand by stock location and optimises reorder levels and economic order quantities by item with respect to service levels and stockholding costs.
Items with consistent demand can be satisfied at a high service level (and infrequent expediting) by relatively low reorder levels. However, erratic-demand items may be better satisfied at a lower service level (with more expediting as necessary) because stock utilisation for high service levels might be poor.
In cases where finished goods demand is erratic but raw material and component demand is much more consistent, an MRP forecast may only drive replenishments as far as the component level with finished goods demand being handled by a reorder level system; the forecast error (both shortfall and surplus) becomes more pronounced as demand becomes more erratic, making this simpler reorder level system less risky to manage.