Optimum Lot-Sizing Procedures System Functions in a Planning Run

In the two procedures described above, the costs resulting from stockkeeping, from the set up procedures or from purchasing have not been taken into consideration. The aim of optimum lot sizing procedures, on the other hand, is to group shortages together in such a way that costs are optimized. These costs include lot size independent costs (setup or order costs) and storage costs.

In so doing, the following problem arises:

If you order often, you will have low storage costs but high order costs due to the high number of orders. If you only seldom place orders then you will find that your order costs remain very low, but your storage costs will be very high since warehouse stock must be large enough to cover requirements for a much longer period.

All optimum lot-sizing procedures adhere to the following pattern:

The starting point for lot sizing is the first material shortage date which is determined during the net requirements calculation. The order quantity must be larger or equal to the shortage quantity. The system then adds successive shortage quantities to this lot size until optimum costs have been established. This then determines the lot size.

The only differences between the various optimum lot-sizing procedures are the cost criteria. The following different procedures are available:

• 
  
Part Period Procedure

• 
  
Least Unit Cost Procedure

• 
  
Dynamic Lot Size Creation

Part Period Procedure Optimum Lot-Sizing Procedures

The part period procedure adheres to the "classic" lot size formula for the minimum costs whereby variable costs (storage costs) are equal to the lot size independent costs.

Starting from the shortage date, successive requirements are grouped together to form lots until the sum of the storage costs equals lot size independent costs. (In other words, this procedure involves an adjustment of quantity-dependent and non-quantity dependent costs.)

The following figures are used in the example:

Price: $20

Lot size independent rcosts: $100

Storage costs percentage: 10%

In the example of the part period procedure above, the best lot size is 2000 pieces because, if more requirements were added to this lot, total storage costs would be larger than the lot size independent costs.

Least Unit Cost Procedure Optimum Lot-Sizing Procedures

Starting from the shortage date, successive requirements are grouped together to form lots until total costs per unit reach a minimum level. The total costs are equal to the sum of the lot size independent costs plus the total storage costs.

The following figures are used in the example:

Price:$20

Lot size independent rcosts: $100

Storage costs percentage: 10%

In the example of the least unit cost procedure above, the minimum cost per unit is achieved with a lot size of 2000 pieces.

Dynamic Lot Size Creation Optimum Lot-Sizing Procedures

Starting from the shortage date, successive requirements are grouped together to form lots until additional storage costs are greater than lot size independent costs.

The following figures are used in the example:

Price: $20

Lot size independent rcosts: $100

Storage costs percentage: 10%

In the example of dynamic lot size creation above, the optimum lot size is 3000 pieces, because an additional requirement of 1000 pieces for the 7/27 would mean that the lot size independent costs would be exceeded.

Groff Reorder Procedure Optimum Lot-Sizing Procedures

1. The Groff reorder procedure is based on the fact that additional storage costs are equal to the saving in lot size independent costs according to the "classical" lot sizing formula for the minimum costs. Additional storage costs resulting from an increase in the lot size are, therefore, compared with the resulting savings in lot size independent costs.

   Starting from a certain period, the system keeps grouping requirements into a lot until the increase in the average storage costs per period is larger than the decrease in the lot size independent costs per period.

   

   The following figures are used in the example:

   Price: $20

   Lot size independent rcosts: $100

   Storage costs percentage: 10%

   In the example of the Groff reorder procedure above, the optimum lot size is 1000 pieces because, for a further requirement of 1000 pieces, additional storage costs would then exceed the savings in lot size independent costs.

Additional Restrictions Optimum Lot-Sizing Procedures

You can influence the various lot-size calculations described in the previous pages by using additional restrictions.

If certain packaging units are to be used for an order quantity, enter a rounding value in the material master record which the system then takes into account during the lot-size calculation.

It may be necessary, due to technical or organizational factors that the lot size to be calculated may not exceed or fall below a certain quantity. In this case, you enter either a minimum lot size or a maximum lot size in the material master record. The system will then take these values into account during the lot-size calculation.

Scheduling System Functions in a Planning Run

During the net requirements calculation, the system determined the shortage quantities and material shortage dates. During lot sizing, the lot sizes and order proposals necessary for covering requirements were determined. These order proposals must now be scheduled. There are two procedures available for scheduling:

• backward scheduling

• forward scheduling

The following times are taken into account for scheduling externally procured materials:

• planned delivery time of the material based on calendar days

• processing time required for purchasing based on workdays

• goods receipt processing time based on workdays

When creating planned orders, the system also takes the following time into consideration:

• opening period based on workdays

Backward Scheduling for External Procurement

Forward Scheduling for External Procurement

Backward Scheduling for External Procurement

With materials that are planned using the forecast-based planning procedure and the MRP procedure, the requirement dates in the future are already known. The materials must be ready on these dates. The release date for purchasing is determined by scheduling, that is, the date that the materials must be ordered, so that they are available for the requirement date. Thus, the system starts with the requirements date and then schedules backwards to determine the release date of the purchase requisition. This procedure is referred to as backward scheduling.

Forward Scheduling for External Procurement

In the reorder point planning procedure, when the planning run determines that a material shortage exists, the date of the shortage is not in the future. This is not possible because once the reorder level is exceeded, material procurement must be organized immediately. During scheduling, the system determines the date when the material must be available starting from the material shortage date. This procedure is referred to as forward scheduling .

Creating Order Proposals System Functions in a Planning Run

During lot sizing, the system determined the quantities needed to cover requirements. It then determined the dates for the order proposals. Now, it must decide whether the receipt should be carried out via in-house production or external procurement. This decision depends on the following factors:

• procurement type

You determine the procurement type by maintaining the material type in the material master record. The system uses this entry to determine which of the following is valid for this material:

• in-house production
• external procurement
• both in-house production and external procurement

If the procurement type is not clearly specified, the system automatically selects in-house production.

• quota arrangements

If the material participates in the quota arrangement, the specification of the procurement type and the special procurement type are additionally determined via the source of supply.

For materials procured via in-house production, the system automatically creates planned orders (when creating the order proposal.)

For materials acquired via external procurement, the system either creates a planned order, which you can then convert into a purchase requisition, or it can create a purchase requisition immediately. This is specified by the creation indicator for purchase requisitions.

If the system is to create a planned order for materials that are acquired via external procurement, this means that the MRP controller has more control of the order proposals. Only once he has checked and converted the planned order into a purchase requisition can the purchasing department order the material. Otherwise, the purchase requisition is available for the purchasing department immediately, and it then takes over the responsibility for material availabiliy and warehouse stocks.

If a delivery schedule exists for a material and if an entry has been maintained in the source list, which is relevant for requirements planning, then the system can automatically create delivery schedules during the planning run. You control this by means of the creation indicator for delivery schedules in the initial screen of the planning run.

For the order proposals determined by the system for externally procured materials, you can use the source list or the quota arrangement to determine sources of supply. A source of supply is, for example, a vendor or an outline agreement (for example, a delivery schedule).

Determining the Source of Supply for Purchase Requisitions

Determining the Source of Supply for Delivery Schedules

Determining the Source of Supply for Purchase Requisitions Creating Order Proposals

For purchase requisitions which are created during the planning run, the source of supply can be determined directly from the planning procedure. Two procedures exist here:

• Determining the source of supply by means of the source list

The system first checks whether a quota arrangement has been maintained for the material whose validity period covers the requirements date of the purchase requisition. The system then checks to see whether only one entry exists in the source list that is relevant to MRP. This means that the indicator for source list usage must be set so that the creation of purchase requisitions is only allowed for one vendor. If this is the case, then a purchase requisition is created with the source of supply which is recorded in the source list.

• Determining the source of supply by means of quota arrangements and the source list

The system first checks to see whether a quota arrangement has been maintained for the material which is valid for the requirements date of the purchase requisition. It also checks to see whether the indicator for quota arrangement usage has been correctly maintained in the material master record. If a quota arrangement exists, the system calculates from which vendor the material should be procured, using the quotas specified for the vendors.

In the second step, the system then checks to see whether an entry, relevant to MRP, has been made for the selected vendor in the source list. This means that the indicator for source list usage must be set appropriately. If this is the case, then all further data required for the purchase requisition is copied from the source list.

Determining the Source of Supply for Delivery Schedules Creating Order Proposals

If delivery schedules are to be created during the planning run, the system must determine a valid vendor and a valid delivery schedule. There are two ways of determining the source of supply for delivery schedules.

• Determining the source of supply by means of the source list

The system first checks whether a quota arrangement has been maintained for the material whose validity period covers the requirements date of the order proposal. The system then checks to see whether only one entry exists in the source list that is relevant to MRP. This means that the indicator for source list usage must be set so that the creation of delivery schedules is only allowed for one vendor. If this is the case, then a delivery schedule is created with the source of supply which is recorded in the source list.

• Determining the source of supply by means of quota arrangements and the source list

The system first checks to see whether a quota arrangement has been maintained for the material which is valid for the requirements date of the delivery schedule. It also checks to see whether the indicator for quota arrangement usage has been correctly maintained in the material master record. If a quota arrangement exists, the system calculates from which vendor the material should be procured, using the quotas specified for the vendors.

In the second step, the system then checks to see whether an entry, relevant to MRP, has been made for the selected vendor in the source list. This means that the indicator for source list usage must be set appropriately. If this is the case, then all further data required for the delivery schedule is copied from the source list.

The specification of the source of supply is completed with the maintenance of the source list, that is, the complete data (vendor, purchasing organization, contract) is maintained for the purchase order.

Supply Source Determination for Retail Order Proposals Creating Order Proposals

Use

This function only applies to work done using Retail.

Purchase requisitions or delivery schedules can be created during the planning run. The system attempts to find a unique source of supply for every requirement. For delivery schedules to be created, the system must find one unique source of supply for the scheduling agreement. Purchase requisitions, on the other hand, can be generated with or without a source of supply. A source of supply in a purchase requisition can either be a vendor or a vendor and an outline agreement.

There are two types of outline agreement: contracts and scheduling agreements. Purchase requisitions are generated in Replenishment Planning for contracts. These are then converted into release orders issued against the contracts. Delivery schedules are generated in Replenishment Planning for scheduling agreements and are issued to a vendor in the same way as a purchase order.

In determining the source of supply, the system proceeds as follows:

1. First it checks if quota arrangements exist;
2. Secondly it checks the source list;
3. Thirdly it checks the supply source indicator in the article master for

1. external supply sources
2. internal supply sources.

If relevant quota arrangement exist, the system checks in Customizing if the quantity required has to be split among different sources of supply (quota arrangement split).

In Replenishment Planning the system only processes unique sources of supply, except if a quota arrangement split has been defined. If the source of supply is not unique, no supply source is assigned to the requirement.

Creation of Exception Messages MM

During the planning run, the system recognizes exceptional situations where you usually have to manually reprocess the planning result and it records these situations as exception messages. These messages depend on the transaction being carried out and are meant to inform you of an event/events that you may need to follow-up (for example, start date lies in the past, safety stock has been exceeded). Exception messages refer to an individual MRP element. If several exceptions occur for one MRP element, the most important one is stored.

By means of the exception messages, you can easily sort out any materials which require manual reprocessing from the rest of the planning result (see MRP List).

Rescheduling Check System Functions in a Planning Run

Rescheduling proposals form an important group which belongs to the above-mentioned exception messages. These refer to receipt elements which are not automatically changed by the system. These include, for example, purchase orders or firm planned orders. During rescheduling, the appropriate elements are automatically provided with an exception message which is linked with a course of action. This helps you with reprocessing, firstly, as the elements to be reprocessed are easy to find and, secondly, because the system has already offered you a suggestion of how to go about reprocessing. Proposals offered by the system can be, for example:

• cancel event

• bring forward event with specification of the proposal date

• postpone event with specification of the proposal date

Rescheduling proposals are only created for receipts that can no longer be changed by the system. Other receipts are automatically adapted to the availability situation during the planning run.

In Customizing, you can select whether the following are taken into consideration for the rescheduling check:

• firmed planned orders

• firmed purchase requisitions

• order item schedule lines

In order to improve system performance, you can set a rescheduling horizon in Customizing so that rescheduling is only carried out for part of the planning period instead of for all of it. The system checks whether the receipts participating in the rescheduling check are necessary to cover requirements. If not, the system creates a cancel proposal in order to avoid excessive warehouse stocks.

If the receipts do not fit the particular situation in question, the system checks whether they can either be brought forward or postponed. The new date is then saved when the receipt takes place.

By using comparison values (which you can set in Customizing), you can control how much of a variance from the original goods receipt date is accepted by the system before it creates deadline shift proposals. The receipt is then used in the following net requirements calculation with the rescheduling date.

The rescheduling check is further explained in the following example:

You have entered two firm planned orders for a material and you have carried out an individual planning run. The planned order for 8/5 covers the reservation's requirements, but it would be too late. As the corresponding exception messages states, the date for the planned order would have to be brought forward to the 8/3.

The planned order of the 8/10 is too early and would have to be postponed to the 8/24.

The planned order of the 8/31 can be cancelled as it would result in an excess in warehouse stock of 1000 pieces.

After processing the planned orders, that is, after changing the dates correspondingly and cancelling the planned order for 8/28, the quantities and dates of the planned orders will then match the requirements situation.

Storage Location MRP

The planning run for materials is carried out at plant level. This means, the system includes the stocks of the individual storage locations in the total plant stock.

However, when maintaining the material master record, you can either exclude certain storage locations of a material from the planning run or you can also instruct the system to plan certain storage locations separately. In so doing, the stocks of the flagged storage locations are treated as a special case in the planning run. The following options are available:

• You can set an MRP indicator at storage location level that excludes this storage location’s stock from the planning run. Thus, the storage location’s stock is not contained in the available stock at plant level, nor is it included in the planning run. The exclusion of storage location stock is only relevant to the planning run - for example, this stock is still completely available for withdrawals.

• You can set an MRP indicator at storage location level that instructs the system to plan this location separately. You also define a reorder level and a replenishment level. In so doing, it is possible to monitor this storage location’s stock automatically, and if the stock level should fall below the reorder level the storage location is also replenished automatically.

The system creates an order proposal for the amount of the replenishment quantity or for a multiple of the replenishment quantity so that the stock level exceeds the reorder level again. Existing firmed receipts for the storage location are also taken into account (similar to the reorder point procedure at plant level). In the planning run, stocks that lie in storage locations which are planned separately are not contained in the available stock at plant level.

Several options are available for procuring stock for storage locations that are planned separately: either via a stock transfer from the plant or via a special procurement. If a receipt element (planned order, purchase requisition, purchase order, production order, and so on) or an issue element (reservation, sales order) refers to a special storage location (one that is either excluded from the planning run or one that is planned separately), then these elements are not taken into account at plant level.

For more information, please refer to sections:

Storage Location MRP with Stock Transfer

Storage Location MRP with Special Procurement

Storage Location MRP with Stock Transfer

If you have set an MRP indicator for storage location MRP, but you have not defined a special procurement type, then the storage location stock is procured by stock transfers from the plant to which it belongs, this means that the storage locations in a plant that are planned as normal provide stock to replenish the special storage locations. The following is carried out in the planning run:

For every storage location whose stock is planned separately, the system compares the reorder level with the stock level of this storage location. If available storage location stock is less than the reorder level, the system creates a stock transfer reservation for the amount of the replenishment quantity or for a multiple of the replenishment quantity. The stock transfer reservation is treated as a receipt at storage location level. At plant level, it is treated as an issue reservation (material reservation).

For storage location "X", you define a reorder level of 30 pieces and a replenishment quantity of 50 pieces. In the planning run the stock level is equal to zero. Since stock (0) has fallen below the reorder level, a stock transfer reservation amounting to the replenishment quantity (50) is created. At the same time, this stock transfer reservation produced an issue at plant level for the same amount.

Storage Location MRP with Special Procurement

If you have set an MRP indicator for storage location MRP, you can control how the system is to procure the material by entering a special procurement type at storage location level. The following special procurement types are available at storage location level:

Special procurement types at storage location level

Special procurement type	Standard key in Customizing
In-house production	-
External procurement	-
Procurement via consignment	10
Subcontracting	30
Stock transfer	40
Production in an alternative plant	80

If you enter no special procurement type at storage location level, the material is procured by a stock transfer reservation from the plant to which the storage location is allocated.

The following is carried out in the planning run:

For every storage location whose stock is planned separately, the system compares the reorder level with the stock level of this storage location. If the available storage location stock is less than the reorder level, the system creates a receipt at storage location level for the amount of the replenishment quantity or for a multiple of the replenishment quantity. The order proposal is either a purchase requisition, a planned order, or a delivery schedule and it refers to this storage location. This means that you can trigger either internal or external procurement for the special storage location.

When creating an order proposal, the system takes the quota arrangements and the source list into account.

The source list can refer to either a contract or a scheduling agreement.

• If the source list refers to a scheduling agreement, the system only takes the scheduling agreement if the storage location recorded in the scheduling agreement corresponds to the special storage location in the material master record.

• If the source list refers to a contract, the system only takes the contract if the storage location that is recorded in the contract is either blank or if it corresponds to the special storage location in the material master record.

Quota Arrangements System Functions in a Planning Run

If a material is obtained from various sources of supply, the individual sources of supply can be provided with a quota arrangement. The quota arrangement applies to a certain period and specifies how the receipts should be distributed amongst each source of supply. Sources of supply include, for example, in-house production or external procurement, other plants as well as individual vendors and outline agreements.

You can determine in the material master record whether a material is to participate in the quota arrangement during material requirements planning. You will find a more detailed description of displaying and maintaining the quota file in MM Purchasing Guide.

For every order proposal (purchase requisition or planned order), the system determines the sources of supply according to the quota file and allocates the order proposal to the source of supply. Furthermore, the system updates the quota file during the planning run.

Thus, for the quota arrangement, the following steps are carried out during the planning run for every order proposal to be created:

• determining the source of supply

• allocating the source of supply to the order proposal

• updating the quota file

The criterion for the selection of the source of supply is the quota rating. It is calculated using the following formula:

The system allocates the order proposal to the source of supply with the lowest quota rating. In this example, the first order proposal is allocated to item 1 and the second order proposal to item 2.

Allocating the source of supply to the quota item determines the procurement type that the order proposal receives. Therefore, you can determine via the quota arrangement that, for example, 40% of a material is to be externally procured and the other 60% is to be produced in-house.

You can allocate a vendor to the order proposal for external procurement by maintaining the quota file. This vendor is either copied directly into the purchase requisition or it is copied into the resulting purchase requisition when the planned order is converted.

For every order proposal which takes part in a quota arrangement, the quota file is updated so that the quota arrangement is always kept up-to-date.

MM Multi-Plant Planning with Stock Transfer

Within the stock transfer procedure, goods are produced and delivered within a company. The plant which is to receive the goods (receiving plant) orders the goods internally from another plant which is in a position to deliver the goods (delivering plant). The dependent requirements for the components to be to be transferred are determined in the receiving plant.

Over and above the normal procedures for transferring stock using transport requisitions, orders and delivery schedules (see MM Managing Special Stocks and Forms of Special Procurement Types), you can also instruct the system to transfer stock from one plant to another automatically during planning via the special procurement type, stock transfer.

Special procurement types are defined in Customizing according to plant, procurement type, and special procurement type and are allocated to the material in the material master record. For materials that are included in multi-plant planning with stock transfer, a material master record with the appropriate special procurement type must be maintained in all plants involved. The following standard settings are pre-set for the special procurement types in Customizing:

Customizing	Procurement type	External procurement
"Stock transfer"	Special procurement	Stock transfer
	Special procurement type	40 - stock transfer

The following example demonstrates the stock transfer procedure.

In plant 0001, a material receives the special procurement key, stock transfer. This specifies that the material is to be procured from another plant (for example, from plant 0002). A requirement which arises in plant 0001 is then covered by stock from plant 0002.

The following happens during the planning run: on detecting a shortage in plant 0001, the system automatically creates a purchase requisition for a stock transfer in plant 0001 and a release order for the purchase requisition in plant 0002. The date of the release order is determined during scheduling. When the stock transport requisition is converted into a stock transport order, the release order in plant 0002 is automatically converted into a reservation.

Procurement is carried out in the delivering plant. The removal from storage of the ordered quantity is carried out by a transfer posting with reference to the release order. The movement type here is, Transfer posting ® Plant to plant ® To stock in transit Stock in transit is the quantity of a material which was withdrawn from the warehouse of the delivering plant but which has not yet been received by the receiving plant. In the receiving plant, a goods receipt is posted for the stock transfer order on receipt of the goods and the stock in transit is entered into the warehouse of plant 0001.

Please note the planning sequence of the various plants during the planning run. Delivering plants are planned after the receiving plants so that all requirements quantities are taken into account.

If for a particular material, special procurement types for stock transfer have been saved in two plants that refer to each other, then once the system has planned both plants, it goes back and plans the first one again.