Inventory Planning Definitions
Here are some select inventory planning definitions that may be helpful.
Available to promise - available to promise takes the simple availability calculation, adds time-phasing and takes into account future scheduled receipts. Available to promise may be calculated for each day or broken down into larger time buckets. The first time period will take on-hand inventory and add any scheduled receipts for that period. It will then deduct any allocations scheduled prior to the next scheduled receipt (which may be several periods in the future). Subsequent periods without any scheduled receipts will have the same available to promise as the previous period. Subsequent periods with scheduled receipts will generally start with a fresh calculation, ignoring any remaining available to promise from previous periods. There are many variations on exactly how available to promise is calculated and it is also important to note that available to promise often works independently of allocation systems.
Allocations - refer to actual demand created by sales orders or work orders for a specific item. A standard allocation is an aggregate quantity of demand for a specific item and location. Standard allocations do not specify that specific units will go to specific orders. A firm allocation is an allocation for specific units within a location. Firm allocations are also referred to as specific allocations, frozen allocations, hard allocations, hard commitments, holds, reserved inventory. Standard allocations simply show that there is demand while firm allocations reserve or hold the inventory for the specific order designated.
Backflush - Method for issuing (reducing on-hand quantities) materials to a manufacturing order. With backflushing, the material is issued automatically when production is posted against an operation. The backflushing program will use the quantity completed to calculate through the bill of material the quantities of the components used, and reduce on-hand balances by this amount. There are usually options during the backflush process to report scrap. In operations using backflushing, it is advisable to set up specific machine locations and have materials transferred from storage locations to machine locations when they are physically picked for production. The backflush operation will then issue the material from the machine locations.
Effective lead time - effective lead time represents a period of time that includes the lead time, plus additional time factors that may occur between the time the need for an order in known, and the inventory is in stock and available. For example, a fixed ordering schedule (orders are only placed on specific days for specific vendors) may add some time to the lead time, as may some internal processing.
Forecast consumption - describes the method(s) that inventory management software uses to reduce forecasted demand by the actual demand that occurs during the forecast period. Incorrectly set up forecast consumption parameters or lack of functionality related to forecast consumption can often create serious problems with planning systems.
Planned order - term used within MRP and DRP systems for system-generated planned order quantities. Planned orders only exist within the computer system and serve multiple functions. One function is to notify the materials/planner or buyer to produce or order materials, which is done by converting a planned order into a purchase order, shop order, or transfer order. Another function is used by the MRP or DRP system to show demand which is used by subsequent MRP and DRP programs to generate additional planned orders. (MRP/DRP systems sometimes run several programs in a specific sequence to generate all planned orders, one program may convert forecasts or customer orders into planned orders which creates the demand the next program uses this demand to create additional planned orders)
Planning bill of material (Phantom) - a fictitious bill of material used to group options of a family of products. For example, you may have a line of notebook computers whereby most of the components are the same, but some will have different hard drives, processors, memory, etc. Rather than creating separate bills for each possible combination and then forecasting each possible combination, you create one large planning bill that contains all possible components but uses the "quantity per" to manage the options. If you expect half of the computers to have 500 GB drives, 25% to have 1 TB drives, and 25% to have 2 TB drives, you would set up each drive on the bill and use 0.50, 0.25, and 0.25 respectively as the quantity per. You would then proceed to do the same for all other options. Your higher level forecast would be for the total demand for all computers in this family. Planning bills are sometimes referred to as Super Bills or Pseudo Bills.
Optimization - in mathematics, computer science and operations research, mathematical optimization (alternatively, mathematical programming or simply, optimization) is the selection of a best element (with regard to some criterion) from some set of available alternatives.
In the simplest case, an optimization problem consists of maximizing or minimizing a real function by systematically choosing input values from within an allowed set and computing the value of the function. The generalization of optimization theory and techniques to other formulations comprises a large area of applied mathematics. More generally, optimization includes finding "best available" values of some objective function given a defined domain (or input), including a variety of different types of objective functions and different types of domains.
Inventory optimization is a method of balancing capital investment constraints or objectives and service-level goals over a large assortment of stock-keeping units (SKUs) while taking demand and supply volatility into account.
[Quantity Available] = [Quantity On Hand] - [ Quantity On Hold] - [Quantity Allocated to Sales Orders] - [Quantity Allocated to Production Orders].
Safety (Buffer) stock. Quantity of inventory used in inventory management systems to allow for deviations in demand or supply. Safety stock calculations will take into account historic deviations and use a required service level multiplier to determine the optimal safety stock level.
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