Replenishment Planning Article

Low Costs and Short Lead Times Using Planned Before Firm

By Nathan Boyd, Forparco

E-Mail Nathan for more information

 

When a part has more than one potential supplier, the buyer has some options: select the vendor with the lower cost and the longer lead time or the vendor with the higher cost and the shorter lead time?  This dilemma is not easily resolved. Too frequently the buyer selects the vendor with the lower cost to improve the department’s purchase price variance measurements.  Unfortunately, inventory and service pay the price.

 

You do not have to sacrifice one for the other.  By selecting both vendors and cleverly using an FGS Replenishment Planning feature called Planned Before Firm, you can mix their schedules to get the bulk of the cost savings and still remain flexible, taking advantage of the shorter lead times.  This is like having your cake and eating it too!

 

This technique is illustrated by an example of a company that can select from two different suppliers:

 

­       An international vendor with low costs and very long lead times

­       A domestic vendor with higher costs but short lead times

Example of a Buyer’s Dilemma

 

An aftermarket wholesaler of heavy-duty truck parts purchased wheel nuts from a domestic supplier that required a four week lead time. An offshore wheel nut manufacturer offered the wholesaler a twenty percent cost savings, if the wholesaler would place orders for container load quantities of mixed wheel nuts with a six month lead time. The problem with accepting the offshore offer is that most of the cost reduction savings will be consumed by the carrying cost of the additional safety stock inventory required to protect customer service against forecast errors over the increase in lead time from four weeks to six months. How can you take advantage of the lower offshore cost without increasing the current inventory levels?

 

 

Initially the international vendor looked like the best alternative because of the 20% cost reduction. However, when the wholesaler measured the cost impact of the long lead time he decided it was not a good deal.  The final solution yields low cost and short lead times.

 

First the wholesaler had to evaluate the impact of purchasing full container loads of mixed wheel nuts.  To evaluate the offshore supplier’s proposal the wholesaler determined a container’s product mix using the Joint Orders tool within FGS’ Replenishment Planning module (refer to the Fall 2002 FGS Newsletter).

 

Figure 1 — Gross Savings by selecting the Offshore Supplier

 

 

The offshore offer provided $13,192 of savings, while the cost (based on a 20 percent carrying charge) to pull in the planned orders to meet the container load minimum was $438 (Figure 1). Therefore the offshore proposal could provide the wholesaler with approximately $12,000 per container or a 19.4 percent cost reduction — still a pretty good deal.

 

The potential problem with accepting the offer is that the lead time for any product purchased from the offshore supplier would have to be increased from four weeks to six months. The company used FGS to investigate the inventory impact of an increased lead time.  Recall the effect of lead time on safety stock:

 

 

The analysis showed that the safety stock increased from $35,025 to $94,720, a $59,695 increase! The annual 20% carrying cost associated with the $59,695 increase is $11,939 (Figure 2). This additional cost reduced the $12,754 savings, yielding a net savings of only $815 or about 1.2% savings per container.  After this review, the company decided a 1.2% savings was not worth the effort.

 

Figure 2 — Net Savings after considering the long lead times

 

 

An Alternative Approach using Planned Before Firm Replenishment Logic

 

Another approach is to order containers from the offshore supplier while continuing to place orders with the domestic supplier until the first container arrives. Then the wholesaler could cover any stock outs that might occur before a container arrives by placing orders with the domestic wheel nut supplier. This approach covers any forecast error within the four week lead-time and thus eliminates the need to carrying the additional safety stock otherwise required to cover the six month lead-time.

 

 

The problem with this approach is that getting the order placed with the domestic supplier is a manual process because most replenishment planning systems’ logic will not generate planned orders before an existing firm order (Figure 3).   Most MRP systems would recommend expediting the 20,000 unit firm order due on 8/1/97.  Unfortunately, this order is on the water.  To expedite this shipment conjures up visions of helicopters landing on ships and flying the wheel nuts to the wholesaler.  Not likely to happen.  The expedite action message is worthless.  All the typical MRP logic can do is warn you of how many units you will stock out.

 

FGS has a feature, not seen in typical MRP systems.  By setting a configuration option: Allow Planned Orders Before Firm Orders, the wholesaler was able to edit the SKU.PLNB4FIRM field to ‘YES’ for the wheel nuts supplied by the offshore supplier. FGS generates planned orders before any firm order for offshore products (Figure 4).  Since the lead time remains at 4 weeks, near- term smaller orders are planned from the domestic vendor

When additional containers of offshore product were placed and loaded as firm orders, FGS generated planned orders for each week’s requirements (Figure 5). It does not generate worthless expediting action notices for a container load order that cannot be expedited.   As these planned orders approach the ordering window outside of the four week lead-time, the planner firms them up with the domestic vendor.

 

As a result, wheel nut purchase orders can be generated with the offshore supplier to take advantage of the twenty percent cost savings yet the lead-time for these products can remain at four weeks. Thus the savings of ordering product from the offshore supplier will not be reduced by the cost of increasing the safety stock inventory to cover the offshore supplier’s lead-time.

Additional required fields to run Plan Before Firm

 

When you setup FGS for this feature, we do not recommend turning this feature on for all of your SKUs. Typically most planners prefer to expedite the existing firm orders rather than inserting planned orders. Instead, we recommend you turn this feature on to selected SKUs only.  To accomplish this you need to edit the Replenishment Planning configuration:

 

MAIN / Configure / Replenishment Planning / Planned Orders before Firmed Orders

               Never allow them

            Always allow them

            Allow them unless SKU.PLNB4FRM=’NO’

Save Configuration

 

Next you need the SKU.PLNB4FRM field defined in your database. Use the PLNB4FRM.CMD command file to create it.  The default value for this field is ‘NO’.  For selected individual SKUs edit it to YES. 

 

If you don’t have this command, contact the FGS Help Desk.  If you would like more information about this feature contact Nathan Boyd.