MRP, ROP and Safety Stock

ROP is an execution tool. It assumes that the future will look like the past. ROP requires exception management when predictable trends, seasonality and special causes (promotions, plant shutdowns, etc.) are a way of life. Some companies execute this very successfully, but it’s not for everyone.

ROP includes safety stock, which (when it’s determined correctly) is a buffer to absorb enough of the random variation in demand and lead time to consistently achieve the target service level without excessive expediting. This enables ROP to avoid the complications of signaling a past-due condition, so the ROP replenishment signal simply says, “reorder this quantity now (but don’t expedite it).”

ROP can be effective when demand and lead time vary dramatically. Many businesses can’t reliably predict that the future will look any different than the past. But they experience significant random day-to-day demand and replenishment-lead-time variation. In this situation, the future average daily demand and lead time will likely look like the past. Importantly, though, future variation in demand and lead time will also look like the past. Historical demand and lead-time variations are therefore reliable forecasts. What these “forecasts” cannot predict is the timing of the random variations. So inventory to cover these random variations must be carried all the time, and that’s safety stock or buffer inventory. The cash required for this inventory doesn’t move, but this tied-up cash enables achieving the target service level without excessive expediting.

Here are two important definitions:

  • Safety stock, or inventory buffer, is only for random variation in demand and lead time that puts service level and an acceptable level of expediting at risk
  • Random variation is any variation for which you cannot reliably predict the timing.

Let’s address just two of the many differences between ROP and MRP:

  1. MRP accommodates a forecast, and
  2. MRP is time-phased.

So MRP can “see” and suggest action on what ROP cannot – upcoming trend, seasonality and special causes in the forecast. MRP is time-phased, so it enables you to plan a future action, such as “order this quantity on this date.” Importantly, MRP can also prioritize a plan of action, such as “order this quantity right now, and expedite it because it’s late.” So MRP is an execution and a planning tool.

Does MRP need safety stock?

Safety stock can be a pejorative word to many MRP practitioners*, so let’s refer to it as an inventory buffer.

*MRP experts know all too well the negative implications of the term “safety stock,” so we won’t detail them here. Suffice it to say that MRP safety stock can and does trigger false past-due and expedite signals, and these tend to cascade and amplify as they work down through the BOM levels. You also know that putting inventory buffers in the right places and at the right levels, along with the way in which you execute MRP, can minimize these false signals.

So now stated differently – “Does MRP need inventory buffers?”

Earlier, we said that an inventory buffer is only for random variation in demand and lead time that puts service level and acceptable expediting at risk. And random variation is any variation with unpredictable timing. You simply can’t forecast this kind of variation, so MRP can’t “see” it. This means you have to carry it in inventory – remember, to the extent it puts service level and expediting at risk – just like you would with ROP. On the other hand, if your random variation doesn’t put service level at risk, or if you can profitably and successfully expedite your way around it, you don’t need inventory buffers.

In either MRP or ROP, “safety stock” or “inventory buffer” is often a critical component of achieving service-level targets while controlling the level of expediting. This requires just the right amount of extra inventory in the right places. Too little, and service level and expediting suffer. Too much, and extra becomes excess. Just the right amount, and you have the perfect, optimal financial combination of service level and inventory performance. ROP or MRP… are you satisfied that you have just the right amount of safety stock – buffer inventory – in the right places?

OKAY – this is where the pitch comes. If you are offended, stop now. If not, and you need any assistance in figuring this out – keep reading. We can help!

TopDown Lean Systems provides analysis of your inventory that lets you see and answer the questions of balancing optimal inventory performance and optimal service level. We can help you determine that optimum service level consistent with your customers” needs, while maintaining peak financial performance for each SKU or raw material in your system.

Contact us for more details, and a no-cost sample analysis of your data! What do you have to lose?