More on item safety stock in AX 2012

Regular readers of this blog (hello you two) will know that I’ve got a bit of a bee in my bonnet about Dynamics AX Master planning, and safety stock / re-order point in particular. You’ll also know that these blog posts come out of my day-to-day work, and currently I’m working with a small manufacturing company here in New Zealand that have been running Dynamics AX 2009 for about five years, but up to now haven’t run master planning – so we’re working through the setup with them.

Obviously the old chestnut of item coverage minimum stock soon became a topic of conversation.

The classic interpretation of safety stock goes something like “it’s the buffer stock that you use to cover your supply lead time” – forgive the over simplification I want to get to classic picture of your inventory over time following this classic ‘saw-tooth’ pattern:


Many New Zealand manufacturers import raw materials, and we obviously have to cope with long lead times. Let’s assume a 60 day lead time and an average demand of about 800 per month. We could setup master planning to give us this classic pattern by using min/max planning, and a minimum stock of 1,600 (to give us enough stock for 2 months). Our net requirements would look like this:


But we can do better than this because Dynamics AX master planning uses the item coverage minimum stock on all three of its planning methods (min/max; requirement (a.k.a. ‘make-to-order’), and period). And it uses the item coverage minimum stock even if you are forecasting your demand. It doesn’t actually matter whether the forecast is entered on the specific item you’re planning (like a finished goods item) – to represent independent demand – or whether the item you are planning inherits that forecast demand because it’s a component or a raw material which has dependant demand. The point is that we have both an item coverage minimum stock and a forecast. Like this:


For the first couple of months everything is hunky-dory, and then the planning goes wild and we end up holding far more stock than our safety stock – because master planning reacts to each demand forecast by recommending a planned purchase order – and that’s the other thing that we typically see in New Zealand manufacturers who are importing raw materials: a regular supply pattern. A purchase order is going to arrive every couple of weeks or so, on a cycle that isn’t directly related to the long, overall purchase lead time. So a more realistic example would be that we’d already have a couple of open purchase order lines (based on the planning we did in the previous months) and now we see:


Even worse.

Obviously my mistake was to set the item coverage minimum quantity based on the simplistic re-order point logic assuming a replenishment period equal to the full purchase order lead time. When you’ve supplies arriving more frequently than your full replenishment lead time, you only need enough stock to cover you until the next supply arrives. Also, when you’re forecasting demand, the safety stock is used to cover un-forecasted demand. Or to put it another way, the safety stock represents your confidence in the accuracy of your forecast. If your forecast was 100% accurate, you wouldn’t need any safety stock. Maybe I’ve been looking in the wrong place – but I haven’t seen anywhere near as much discussion about setting safety stocks like this – but the discussions I have seen relate to buffer stocks and Kanban sizes. In the toy-town example I’m presenting we can reduce the buffer stock dramatically and still plan never to go below 2 weeks stock:


And this screen shows another Dynamics AX master planning subtlety: the implicit safety stock that is hiding in my supply order minimum quantity.

Easy to over egg this particular pudding.

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