Replenishment Types. Buy Type M, known as Min/Max, is set up on the warehouse item record on the Purchasing tab.

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1 Replenishment Types A. Replenishment Calculations for Buy Type M Buy Type M, known as Min/Max, is set up on the warehouse item record on the Purchasing tab. The minimum and maximum values are manually entered onto the warehouse item record. When an item is marked as Buy Type M, the Suggested Buy Report <POSB> looks to see if the available quantity calculated within the report 1 is below the minimum on the item. When the available quantity falls below the minimum, the suggested buy will suggest purchasing up to the maximum. If backorders exist the system will suggest purchasing up to the maximum plus the quantity that is on backorder. B. Replenishment Calculations for Buy Type E Buy Type E, known as EOQ or Economic Order Quantity, is set up on the warehouse item record on the Purchasing tab. The Buy Type E uses Gordon Graham s formula. First, run <ITRPM> to setup replenishment defaults that are used for all items. Note: These default values are not used if specific item values are entered in <WAITM> on the Purchasing tab. Next, run <ITRPU> as part of your month-end procedures. This is to update the EOQ replenishment controls that can be seen on the Purchasing tab of <WAITM>. These replenishment controls are order point, line point and EOQ values. Checkbox options include updating average monthly usage 2, order point, line point and EOQ. The <POSB> report uses these values when determining the suggested order quantity. Usage information for an item may be reviewed through <ITUSA> or via the Usage tab in <WAINQ> or <POSB>. When an item is marked as Buy Type E, the Suggested Buy Report <POSB> looks to see if the available quantity calculated within the report 3 is below the order point on the item. When the available quantity falls below the line point but is above the order point then suggested buy will suggest purchasing the EOQ. When the available falls below the order point the suggested buy will suggest making up the difference then buy the EOQ calculated in <ITRPU>. 1 See Appendix A for Suggested Buy available calculations 2 See Appendix A for Average Monthly Usage calculations 3 See Appendix A for Suggested Buy available calculations

2 EOQ calculations are as follows: Order Point = (Average Monthly Usage * (Average Lead Time / 30)) + Safety Stock % Line Point = Order Point + (Average Monthly Usage * (Vendor Review Days / 30)) The following calculation comes from Gordon Graham: EOQ = SQRT((24 * Replenishment R Cost 4 * Average Monthly Usage) / ((Carrying K Cost % *.01) * Purchase Unit Price)) Or EOQ = 24 * Cost of Ordering(R) * Usage Rate Cost of Carrying Inventory (K) * Unit Cost Inventory Replenishment System Default Maintenance <ITRPM> 1. Default Safety Stock % (Each item has its own Safety Stock % in <WAITM>, on the Purchasing tab). Safety Stock is an amount that is added to the calculated order point to protect you from the circumstance where actual demand is greater than the calculated average demand. Safety stock also protects the situation where actual vendor lead-time is longer than the average lead-time used in the order point calculation. 2. Replenishment R Cost is the cost of ordering the item. R cost is composed of: a. Cost to maintain a record system, including personnel to count warehouse and related computer time. b. Portion of the cost of maintaining a purchasing staff Profile of stock to non-stock sales requiring purchasing to buy stock items, i.e. 70% stock to 30% non-stock results in a 70% portion. c. Cost of processing accounts payable to your suppliers. d. Cost associated with expediting orders for stock that has not arrived on time. 4 See <ITRPM> or <WAITM> Purchasing tab for the Replenishment R Cost, Carrying K Cost % and Average Monthly Usage.

3 3. Carrying K Cost is the cost to own the item. K cost is composed of: a. Cost of warehouse where stock is stored (equal to rental value of the warehouse space). b. Amount of yearly taxes on that inventory. c. Cost of insuring inventory against loss. d. Cost of obsolescence and shrinkage in the inventory. e. Cost of moving inventory in the warehouse from receipt of order until stock is put away (do not include cost to pull for sales). f. Cost of money invested in the inventory. Add all six factors together and divide by average value of inventory. An alternative would be to use the industry-wide average of 20%. Another alternative would be to use 20% industry average for the first five costs and then to use your short term borrowing rate to cover the cost associated with the amount of money you have invested in inventory. If you do this, it is appropriate to subtract out the percentage of cost of inflation you are experiencing on an annual basis from your vendors. The formula would be: 20% plus your short term borrowing rate percentage or the annual cost of inflation on inventory purchases from your vendors. 4. Seasonal Adj - A value in this field restricts the order point from being updated for those items that are marked seasonal 5. Usage Months For a non-seasonal item, this determines the number of months usage, prior to the current date, the system will include in the average monthly usage. For a seasonal item, this determines the number of months from the current date, in the previous year, the system will include forward in the average monthly usage.

4 To adjust EOQ for an item: Suggested Buy Too Little Too Much Action Lower K Cost Raise K Cost Example for determining Inventory Carrying Cost: Type of Cost Amount A. Cost of warehouse space $50,000 B. Cost of inventory taxes $25,000 C. Cost of inventory insurance $25,000 D. Cost of obsolescence and shrinkage $50,000 E. Cost of materials handling $50,000 F. Cost of money invested in inventory $100,000 $300,000 If the average value of the inventory is $1,000,000, to determine the carrying cost, divide $300,000 by $1,000,000 to get.30 or 30%. C. Replenishment Calculations Buy Type C Buy Type C, known as Item Usage Classification method, is set up on the warehouse item record on the Purchasing tab. To determine the item classification run <ITRPU> with the option Classification checked. Classification value is determined by taking the total cost of goods sold for the year and dividing it into 12 classification categories. When an item is marked as Buy Type C the Suggested Buy Report <POSB> looks to see what the classification set on the warehouse item. Then it takes that classification and multiples it by the average monthly usage of the item to determine the suggested order quantity D. Replenishment Calculations Buy Type H Buy Type H, known as Hits, is set up on the warehouse item record on the Purchasing tab. When an item is marked as Buy Type H, the Suggested Buy Report <POSB> calculates the suggested buy quantity to be the average monthly usage of the item times the classification by hits figure. Classification by hits is calculated in <ITRPU> by selecting the checkbox Classification By Hits. The system ranks items by the number times picked in the last 12 months.

5 Appendix A Suggested Buy Available Calculation: SBA = Qty. On Hand Qty. Committed Qty. on Backorder + Qty. on Purchase Order Standard Average Monthly Usage Calculation: Average monthly usage is determined by the default months in <ITRPM> or overridden by warehouse item records average months field on the Purchasing tab. The system looks back this many months to get and average monthly usage. Example: Average Months is set to 3 months. The usage for the last three months is as follows 100 pieces, 75 pieces, and 89 pieces. The system will take the sum of the three months which is 264 pieces, and divide it by three, the number of months. This will give you the average monthly usage of 88 pieces. Standard Average Monthly Usage Calculation using Jon Schriebfeder s Demand Formulas in the Item Forcast Program <FCAST>: The program <FCAST> is an advanced method of determining average monthly usage that uses the Demand Formulas of Jon Schriebfeder. The system looks at the 16 different demand formulas and determines which formula to use for calculating the average monthly usage by the lowest standard deviation of the past three months of calculations. The Item Forecast program does not require items to be marked seasonal. The system determines if the item is seasonal based on the formulas. An item needs at least 24 months of usage to determine these calculations. Seasonal Standard Average Monthly Usage Calculation: When an item is marked Seasonal on the warehouse item record the system calculates the usage by looking back 12 months, then forward the seasonal months to get the months used in the average. Determining Classifications for C Buy Type: The system takes the total cost of goods sold for the last 12 months and divides it into 12 categories. The system then assigns the category to the warehouse item record. Determining Classifications for H Buy Type: The system takes the total number of picks for the last 12 months and divides it into 12 categories. The system then assigns the category to the warehouse item record.