Practical use of Reorder Point and EOQ with Microsoft Dynamics AX

EOQ formula mentioned earlier is usually applicable to operations where demand is relatively steady. Even though, it can also be used in the cases where demand varies. In those cases the standard formula for EOQ can still be applied to shorter periods where demand is steady.

There are also some research papers available on the optimal order quantity calculation for changing demand, for exapmle: An Economic Order Quantity Model For Time-Varying Demand.

The reorder point can be automatically calculated in standard AX using Safety Stock journals. The functionality for automatic Economic Order Quantity calculations is available in Microsoft partner solutions, particularly for the wholesale industry.

Automatic calculation of EOQ should be used cautiously - you need to understand exactly what algorithm is used in the system and have correct input data required for EOQ calculation.

© Andrey Maslov

Multi-site and Locations View in AX 2009

A site (mentioned in previous post) in AX basically represents a phisical location where company's warehouses and production units reside in one same area constituting a company's facility (e.g. plant or distribution center). The business sense of having sites in new version of AX can be thought as adding one more structuring layer to support organizations with distributed operations.

For those who are familiar with Inventory Management in previous versions of AX, the site is technically an additional storage dimension (along with warehouse, batch, etc.) defined in the dimension group for the item.

AX 2009 provides so called locations view for navigating through various elements of the company's supply chain, including sites:

I’d rather call it operation view (by analogy with organization view that is also available in the system) especially if the idea was to further extend this convenient tool by creating sophisticated visual model for the entire supply chain. Well, I'm probably dreaming at this point now ... :-)

© Andrey Maslov

Reorder point and EOQ in standard functionality of AX 2009: using Master Planning for automatic replenishment

In standard AX automatic replenishment is realized by Master Planning functionality that can suggest you to buy, produce, or move certain quantity of your inventory:

Those suggestions (Planned orders) are based essentially on the current inventory (including e.g. purchase orders in process), forecast data (demand we expect) and item parameters.

The reorder point and order quantity (EOQ) can be set up in the coverage paramenters of the item. They need to be calculated manually and set up as Minimum (reorder point) and Maximum (order quantity) stock for specific location (site and warehouse). The Minimum and Maximum parameters can take different values in different periods for the same item - to adapt reorder point and economic order quantity for uneven forecasted demand.

© Andrey Maslov

Inventory management: reorder point and economic purchasing

In the assignment (see previous post) our decision making in regard to Inventory Management was focused on combination of only two parameters: reorder point and economic purchasing.

The reorder point is the inventory level that, when it’s reached, triggers new purchase ordering. The reorder point is calculated to ensure we won’t get short of materials while waiting for new purchase order to arrive. The reorder point usually embraces some reserved quantity – safety stock for the cases of higher demand than it was predicted:


Diagram based on picture from Managing Business Process Flow by Ravi Anupindi and others

The size of purchase order was to be a compromise between fixed costs per order and losing or earning interest on our cash balance, e.g. a large purchase order quantity could help us save on order fixed costs but might also cause more loses (opportunity cost) from interest that wouldn’t be earned. The optimal size of purchase order can be calculated using the formula for EOQ (Economic Order Quantity):



In case of our assignment, fixed cost per order was given to us, expected annual demand could be calculated based on sales forecast, and unit holding cost per year could be calculated based on annual interest we would lose if we buy one unit of material and keep it for one year. There are some considerations for practical use of this formula that I’ll mention later.

© Andrey Maslov

Inventory management in Microsoft Dynamics AX and beyond – Intro

This posting has been inspired by the assignment we did recently in our Operations course at my business school taught by Professor David A. Johnston. We had special software application on the Internet that simulated the production facility consisted of: incoming customer orders, outgoing purchase orders, incoming materials from supplier, buffers and queues, stations (machinery), cash and completed jobs shipped to customers.

So, basically, our work on that assignment split into the following integrated streams:

• Capacity management – to ensure we don’t have bottlenecks and growing queues of materials and WIP at our stations on the shop floor
• Inventory management – not to get short of materials and ensure economic purchasing
• Cash management – the goal of the assignment was to maximize our cash position by the end of the simulation period of 268 days. We could pay for materials, receive payments from customers, buy and get rid of machines, and accumulate interest on our cash balance.
• Output management – focused on customer service quality in terms of customer’s order lead time (order lead time directly affected our prices and margin)

As we had several competitive teams going through this simulation in parallel, each team needed to be as lean as possible in terms of saving its cash and at the same time trying to maximize its net cash flow.

Even though that was a simplified model, it gave me some good practical sense of being in COO’s position and called for my experience in the real world of inventory management improvements in ERP implementation projects. In this series of posts I wanted to focus on various aspects of Inventory Management best practices and how they could be realized with Microsoft Dynamics AX.

To be continued ...

© Andrey Maslov

Follow-up comments on "Discover Microsoft Dynamics AX"

Well, we've got a really great session over there! Some of the interesting points that came up during the Q&A part of the discussion were:

• Shared services centers - how AX can support them for better efficiency of distributed businesses
• How to prepare for IFRS that are coming to North America to become a mandatory requirement
• How enterprise solutions can support the business with very limited operations in spokes (in 'hub and spokes' configuration) with poor communication channels
• Global company's strategy and options for integration of newly acquired businesses

These are some of the questions we will be following up on with our clients and here on this blog. Let's keep in touch ...

© Andrey Maslov