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Process documentationCalculation of EOQ and SFT Using Poisson Distribution

 

The system uses this process to calculate the economic order quantity (EOQ) and safety stock (SFT) for a location product dependent on each other. You, or the system, have previously decided on Poisson distribution for this location product when choosing the calculation model. Using Poisson distribution, the system first calculates the economic order quantity and then the safety stock.

Process

  1. The system calculates the EOQ according to the following formula:

    • Omega represents the costs you require to place a purchase order. You can specify these costs in the location product master data on the SPP Inventory Planning tab page in the Fixed Costs: Push and Fixed Costs: Pull fields.

    • m is the forecasted demand of the next 12 periods.

    • CStk is the yearly total stockholding costs. The system calculates these according to the following formula:

      • Q is the purchase order quantity.

      • cStk are the yearly stockholding costs per unit. You can define these by entering a percentage in the Stockholding Costs field on the SPP DRP tab page in the location product master data. The system defines the yearly stockholding costs per unit by applying this factor to the procurement costs that you can specify in the location product master data on the Procurement tab page in the Procurement Costs field.

  2. The system applies the following restrictions to the EOQ:

    • The EOQ is at least one pack size.

    • The length of the EOQ is restricted by the limits of the minimum and maximum number of days that the EOQ period can last for. You can specify the minimum and maximum number of days in the location product master data on the SPP Inventory Planning tab page in the Min. EOQ Per. and Max. EOQ Per. fields.

  3. The system applies the DRP rounding rules to the EOQ.

  4. The system calculates the order items expected during the procurement lead time.

  5. The system determines the minimum number of order items. Using Poisson distribution, the system calculates how many order items must be fulfilled to reach the target service level on the basis of the order items expected during the procurement lead time. The system multiplies this minimum number of order items by the average demand size per order item, and in doing so calculates the reorder point.

  6. The system calculates the safety stock according to the following formula:

    SFT = Reorder Point - Demand/Replenishment Lead Time