What This Article Covers
- What are the Rounding Value and Lot size and How do they Work to Support Supply Chain Planning?
- Where are the Rounding Value and Lot Size Found in SAP SNP?
- Rounding Value and Lot Size as a Forms of Order Batching
- A Comparison of the Different Values Set for Each
- Our Work in Rounding Value and Lot Size Setting
- What is a Fixed Order Quantity?
- What is a Fixed Order Quantity Inventory Model or Fixed Order Quantity System?
- What is a Period Order Quantity and Periodic Order Quantity
- What is Fixed Period Inventory System?
- How Does a Fixed Order Quantity System Relate to a Minimum Order Quantity, Minimum Quantity or Minimum Ordering Quantity
Introduction to Rounding Value and Lot Sizes
The way these two fields control the procurement is relatively simple but important to know. The Minimum Lot Size is used to mostly make SAP SNP wait until enough requirements have been gathered before an order is placed. This prevents material being shipped in uneconomic quantities. The Rounding Value essentially does the opposite; it round-up the order quantity. The Minimum Lot Size and Rounding Value can be of course be used in conjunction with one another.
- The Minimum Lot Size is the minimum quantity which the product can be ordered in.
- The Rounding Value the quantity multiple which the order is rounded to.
However, if the Rounding Value is higher than the Minimum Lot Size, the Rounding Value can act to increase the order quantity. It can increase it above the requirement. This is why the Rounding Value and Minimum Lot Size can be related under the right circumstances.
Where is Rounding Value and The Lot Size Set in SAP SNP?
Both of these values can be seen in the screenshot below which is Lot Size tab in the Product Location Master.
Comparative Value Analysis
A good exercise is to show different examples of Minimum Lot Sizes (MOS) with Rounding Values (RV) to demonstrate how SNP would respond.
- MOS = 0, RV = 15: In this case as soon as the first requirement for one is generated that is not covered by planned Stock on Hand, an order for 15 would be created. This would be the setting useful for high-profit items.
- MOS = 5, RV = 15: Any MOS which is lower than the RV makes the MOS virtually unused. For the MOS to contribute to the ordering in any way, it must be higher than the RV. Therefore, this setting would behave the same as the example above.
- MOS = 5, RV = 3: In this case, the purchase order minimum becomes 6, which is 2 x the RV of 3. In this scenario, the MOS effectively becomes 6, and order quantities are possible in the sequence of 6, 9, 12, etc..
- MOS = 10, RV = 1: An RV of 1 would make no sense as the system is already required to order only in integer quantities. Therefore, for the RV to have any effect on ordering, it must always be above 1.
- MOS = 10, RV = 10: When the MOS is set equal to the RV, it means that the RV has no effect for the lowest order amount, but then controls the order increment after the MOS.
Where The Rounding Value Can be Set and How it Can be Recognized
There are several places to set the Rounding Value, as the quote below from SAP Help describes.
“The following applies for optimization-based planning: If you do not enter a rounding value or enter the value 0, the system uses the rounding logic of the production process model (PPM).
If you specified a rounding profile in the location product master, the system uses this profile instead of the rounding value. The SNP optimizer, deployment and the TLB all ignore the rounding profile.
You have to choose the discrete optimization method in the SNP optimizer profile and enter a discretization horizon in the Integral PPMs field of the Discrete Constraint tab page for the SNP optimizer to be able to take the rounding value into account.
So that the SNP-TLB can use the rounding value, you must set the corresponding indicator in Customizing for SNP under Basic Settings -> Maintain Global SNP Settings. Otherwise the SNP-TLB uses only the rounding value from the transportation lane.” – SAP Help
Rounding Value and Lot Size as Forms of Order Batching
Both the rounding value and lot size are forms of order batching. Order batching is performed in order to produce order quantities that are economic. The opposite of order batching is called lot for lot ordering, which is simply ordering in quantities that match the sales orders that are placed upon the system. Order batching allows for order quantities to be purchased or produced that are economically viable for the company.
Most supply planning systems work by variable order quantities combined with things like a minimum order quantity or rounding value to not incur too much in the way of transactional costs or shipping costs in any particular order.
While the variable order quantity is the most common approach used in supply planning, there is a competing approach where the order quantity is kept static or a fixed order quantity, but the order quantity can be placed at any time. This is the fixed order quantity model of fixed order quantity system.
What is a Fixed Order Quantity Inventory Model or Fixed Order Quantity System?
This describes not so much a particular software application, but rather how the software is configured to restrict orders to a fixed order quantity. The fixed order quantity may be connected to a reorder point. The reorder point is the level of inventory or planned inventory that a stocking position falls to which triggers an order to be placed, in this case, an order of a fixed order quantity.
What is a Period Order Quantity or Periodic Order Quantity and the Fixed Period Inventory System?
A period order quantity or the periodic order quantity comes from a time before computers when orders were placed at specific intervals or periods. This is most often called periodic inventory system but can be called a fixed period inventory system.
In the computerized age, the only real time when a fixed period inventory system and resulting period order quantity makes any sense is when orders must be placed by a specific day or time. Therefore now it is quite unusual to see periodic order quantities generated from systems. The opposite of a periodic order system is a perpetual order system. Computerized inventory systems are perpetual systems. The update automatically when any goods issue or goods receipt is provided to the system.
They also calculated planned inventory by things like purchase orders, sales orders and production requisitions, which does not require the stock to be incremented or decremented at the time of the calculation.
This can occur when a shipment is required to be made to an isolated location. For instance, for scientists working in the Antartic, multiple shipments per year are not feasible. They must be supplied once per year. This is a periodic inventory system, in this case yearly.
How Does a Fixed Order Quantity System Relate to a Minimum Order Quantity or Ordering Quantity
A variable order quantity system requires a minimum order quantity as the order quantity can be anything. However, imposing a minimum quantity is only necessary when the order quantity is not preset. In a fixed order quantity system, the minimums are calculated into the fixed order quantity that is uploaded to the system. Therefore the fixed order quantity is the minimum quantity.
The Rounding Value is a consumption logic parameter. All consumption logic parameters should be set per product location. They can also be established by a grouping of product locations by understanding the interaction with the other consumption parameters. This is best accomplished by displaying a spreadsheet or table of product locations and their consumption parameters to those with the business knowledge to intelligently provide feedback on what the parameters should be. After this initial meeting, the consumption parameter results should be analyzed to fully understand what the implications are for what the agreed upon settings are and socializing that analysis among a broad group of decision makers. This continues not to be done in companies. This is why they still have problems with ensuring that their consumption logic parameters are internally and externally consistent.
The fixed order quantity system is not commonly used. One reason for this is that once the minimum ordering quantity or minimum quantity is attained, there is little benefit (in most cases, but not all as we have seen) to limit the order quantity to a fixed ordering quantity.
Brightwork MRP & S&OP Explorer for Order Optimization
Order Sizing and Optimization
SAP ECC and SNP cannot be run effectively for MRP and supply planning without help from another application.
Order optimization is necessary in order to get the predicted value from ERP and other supply planning applications. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:
Lean Reorder Point Book
A Lost Art of Reorder Point Setting?
Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?
Implementing Lean in Software
All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.
Are Reorder Points Too Simple?
Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.
There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.
Rather than “picking a side,” this book shows the advantages and disadvantages of each.
- Understand the Lean Versus the MRP debate.
- How Lean relates to reordering points.
- Understand when to use reorder points.
- When to use reorder points versus MRP.
- The relationship between forecastability and reorder points.
- How to mix Lean/re-order points and MRP to more efficiently perform supply planning.
- Chapter 1: Introduction
- Chapter 2: The Lean versus MRP Debate.
- Chapter 3: Where Supply Planning Fits Within The Supply Plan
- Chapter 4: Reorder Point Planning
- Chapter 5: Lean Planning.
- Chapter 6: Where Lean and Reorder Points are Applicable
- Chapter 7: Determining When to use Lean Versus MRP
- Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning
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