Raw Material/ Components Solutions
Plan To Cover Forecast Shortfall/ Downstream-Demand Uncertainty
A raw material and/or component solution varies according to the configuration of the ERP/ inventory management system:
- Replenishment 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 by MRP Forecast
Where a forecast 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 forecast exceeds requirements, a surplus arises: this element of the forecast error is excluded from any analysis.) Inventory Strategy Manager is configured to analyse the forecast shortfall error and set safety stocks accordingly.
Although there will invariably be some forecast shortfall error, this becomes more pronounced as finished goods (dependent) demand becomes more erratic and forecast accuracy declines. However, component and raw material demand may be relatively consistent and ensuring availability at this level enables consistent, if slightly longer, lead times for finished goods to be offered to customers.
2. Replenishment by Reorder Level (no forecast)
In this simpler case, requirements are analysed and a reorder level is calculated based on service levels and stockholding costs. The methodology here is the same as a finished goods solution.