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 Calculation of EOQ and SFT Using Normal Distribution

Purpose

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 normal distribution for this location product when choosing the calculation model .

Process

  1. The system determines a minimum quantity for the calculation. This minimum quantity is the demand during the plan approval and review time in distribution requirements planning (DRP). The system rounds this demand in the following order:

    • Rounding to the average demand size per order item (demand/item)

    • Rounding to the minimum EOQ demand period, which you can specify in the location product master data on the SPP Inventory Planning tab page in the Min. EOQ Per. field.

    • If the EOQ/SFT calculation refers to an entry location, rounding to the minimum purchase order quantity, which you can define in the location product master data on the SPP Inventory Planning tab page in the Minimum PO Quantity field.

    • If you want to consider price reductions during EOQ/SFT calculation, rounding to the minimum purchase order quantity for price reductions. You can specify price reductions and pricing scales in the location product master data on the Procurement tab page in the Cost Function field.

    • Rounding to the next biggest pack size, whereby the minimum purchase order size must be at least one pack size.

  2. The system calculates the safety stock using a purchase order quantity according to the following formula:

    • k is the quantile of the standard normal distribution of the effective service level during the replenishment lead time. The system calculates the effective service level during the replenishment lead time according to the following formula:

      • ESL RLT is the effective service level during the replenishment lead time.

      • TSL is the target service level.

      • Q is the presumed purchase order quantity.

      • RLT is the combined delivery time . Here, the system uses the same unit of measure as for sigma.

      • Sigma is the standard deviation of the forecasted demand per period.

        If the safety stock calculated here exceeds or falls short of defined upper or lower limits, the system uses the limit values that you defined. You can define upper and lower limits on the SAP Easy Access screen under Start of the navigation path Advanced Planning and Optimization Next navigation step Service Parts Planning (SPP) Next navigation step Planning Next navigation step Inventory Planning Next navigation step EOQ and Safety Stock Next navigation step Values of Target SFT and Target Service Level End of the navigation path .

  3. The system calculates the yearly total costs. These consist of the yearly total stockholding costs plus the yearly total ordering costs.

    The system calculates the yearly total stockholding costs according to the following formula:

    • Q is the presumed purchase order quantity.

    • c Stk 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 or to the pricing scales. You can specify these in the location product master data on the Procurement tab page in the Procurement Costs or Cost Function field.

      The system calculates the yearly total ordering costs 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 months.

    • Q is the presumed purchase order quantity.

  4. The system varies the purchase order quantity within the limits of the minimum quantity defined in 1 and the maximum number of EOQ periods. You can specify this maximum number of EOQ periods in the location product master data on the SPP Inventory Planning tab page in the Max. EOQ Per. field. For each variation of the purchase order quantity, the system repeats steps 2 and 3, and chooses the combination of EOQ and SFT that have the lowest yearly total costs.