Manufacturing companies face the challenge of deploying most appropriate reordering policies and one of these is the ABC classification of items that they produce. When ABC classification is used for inventory control and supply planning, items are managed according to three different classes depending on their value and volume relative to the total stock. The value-volume distribution of the three classes is shown in the following table:

 

CLASSPERCENT OF TOTAL STOCK VOLUMEPERCENT OF TOTAL STOCK VALUE
A10-2050-70
B2020
C60-7010-30

Effort and money can be saved by applying looser control to items of low value-volume as compared with the items of high value-volume by using the ABC classification. The Reordering Policy field on item cards in Microsoft Dynamics 365 Business Central ERP offers four different planning methods that determine how the individual planning parameters interact. The following illustration shows which reordering policy in Business Central is best suited for A, B, and C Class items respectively.

 

 

Best practices for selecting between the four reordering policies which can be defined in the Dnyamics 365 Busiess Central ERP are explained as follows:

Reordering Policy selected for Item Planning: Order

Best Practice:

  • Use for items categorised as ‘Class A’.
  • Use for make-to-order items.
  • In manufacturing, use for top-level items and for expensive components and sub-assemblies.
  • Use for items that are purchased as drop shipments and special orders.
  • Do not use if you do not accept automatic reservation.

Insights:

Class A items, such as leather couches in a furniture store, are high-value items with low and irregular order velocity where carrying inventory is not feasible, or the required attributes vary. The best reordering policy is therefore the one that plans specifically for each demand.

Reordering Policy selected for Item Planning: Lot-for-Lot

Best Practice:

  • Use for ‘Class B’ items.
  • In manufacturing, this shall be used for components that occur in multiple BOMs. This ensures that purchase orders are combined for the same vendor and hence better prices can be negotiated.
  • Use if you are not sure about which reordering policy to select.

Insights:

‘Class B’ items, such as routine automobile maintenace supplies, have a regular and fairly high order velocity, but also high carrying costs. The best reordering policy for ‘Class B items’ is therefore one that is economical by combining demand in the reorder cycle for a particular lot.

Generally 80 percent of manufactured items can use this policy.

This policy can be used successfully without reorder point planning parameters i.e., reoder point, reorder quantity, maximum inventory, overflow level and time bucket etc.

Reordering Policy selected for Item Planning: Fixed Reorder Quantity

Best Practice:

  • Use  for ‘Class C’ items.
  • Combine with reorder-point parameters.
  • In manufacturing, use for lowest-level components.
  • Do not use if the item is often reserved.

Insights:

‘Class C’ items, such as low hydrogen E-7018 type welding alloys, are low value items with high and regular order velocity. The best reordering policy for ‘Class C’ items is therefore one that guarantees constant availability by always staying above a reorder point.

If the user reserves a quantity for some distant demand, then the planning assumptions will be disturbed. Even if the projected inventory level is acceptable with regard to the reorder point, the quantities may not be available because of the reservation.

Reordering Policy selected for Item Planning: Maximum Quantity

Best Practice:

  • Use for ‘Clas C items’ with high carrying costs or storing limitations.
  • Combine with one or more order modifiers i.e., Minimum, Maximum Order Quantity or Order Multiple.

Insights:

‘Class C’ items, such as automobile air filters, are lowvalue items with high and regular order velocity. The best reordering policy for C items is therefore one that guarantees constant availability by always staying above a reorder point, but below a maximum inventory quantity.

To modify the suggested order, you may want the order quantity to be decreased to a specified maximum order quantity, increased to a specified minimum order quantity, or rounded up to meet a specified order multiple.

Note: If used with a reorder point, then inventory stays between the reorder point and the maximum quantity.

Micosoft’s ERP System for Manufacturing

Dynamics 365 Business Central ERP scales with your business as you expand into other markets and helps keep client and company data secure. It extends your everyday processes as you grow because the ‘Premium Edition’ includes manufacturing and supply chain planning which includes.

  • Planning for raw materials.
  • Support for assembly and process based manufacturing.
  • Provision for allocation of capacities at the machine or work center level(s) and synchronization with the base work week calendar.
  • Production scheduling.
  • Production routing.
  • Supply chain, manufacturing and operations integration.
  • Actionable insights by through business intelligence and artificial intelligence (AI) modules for timely and focused business decision making.

Credits: This blog post is created using materials published by Microsoft® for marketing and training purposes. 

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