So, my wife is the kind of person that will go to four different shops looking for the best deal on something that she needs, and then there is me, polar opposite! I’m in the “Find it, buy it, then justify it” camp (all the while arguing why my way was better)!
When calculating your reorder points (ROP) and reorder quantities (ROQ) the approach is a wee bit different. But, while you are probably still picturing my wife and I arguing over who is right, please stick with me. My last post covered the ROP so we will focus on the ROQ this time.
The ROQ is more about COST when compared to the ROP which is more focused on RISK. Cost still matters but risk is the celebrity in the ROP/ROQ relationship. The ROQ is like a celebrity’s Personal Assistant. Particularly important, but works backstage to make sure that everything works efficiently and effectively.
If you were to have no ROQ at all, you would simply replenish your stock back to the ROP. For a sizable portion of your MRO inventory, this is the optimal stocking strategy for materials that need to be stocked. Especially for the more expensive and critical materials. The procurement team should be coached on this point. The ROP covers RISK while the ROQ focuses on COST. If the ROQ is greater than one, work hard to negotiate back down to one (where it makes sense). Low value materials (consumables) like gloves will need ROQs greater than one. This is where they come into their strength.
Shown below is an example of the cost difference where a valve that cost $1,000 has an ROP and ROQ of one. The second set of numbers shows the cost if the ROQ is increased to two. The result, after applying an annual carrying cost and purchasing cost, shows an increase in cost by 29% for PO’s created manually and 39% for PO’s automatically generated.
Now imagine this being applied over thousands of materials. Innocent decisions like this (buy two instead of one) are why I call it a 'death by a thousand cuts'. A bunch of minor changes can result in a significant negative financial impact on the balance sheet.
ROQ versus Max
One major ROQ and MAX are similar but when you dig a bit deeper you find that they are quite different. Like the initial picture of this article. It shows two dogs but when compared to each other, they are quite different. The big dog covers the threats (risk) and the small dog guides the big dog (very much like the story of the Elephant and the Rider).
Here are few points to consider when setting the ROQ:
- The best ROQ is no ROQ at all! Just replenish back up to the ROP.
- The ROQ does NOT have to be greater than the ROP.
- The ROQ is NOT a rounding value.
- Don't lose focus on the ROP, it must cover the RISK and ROQ works to cover the risk at the lowest possible cost.
- The ROQ helps you optimize costs when replenishing back up to the ROP and beyond.
So let me ask a question before I knuckle down and try to convince you to switch from a MIN/MAX approach to an ROP/ROQ approach.
What operational benefit (risk and cost) are you delivering to the business by stocking materials above the reorder point? Can you prove it?
Simply put, the MIN/MAX strategy is not an ideal MRO materials management strategy, it was developed for direct materials in a production environment. If you are not calculating your MAX (and your MIN), I can just about guarantee that you are over-stocked, and in many cases under-stocked. This is chaos that you have become accustomed to and that is an expensive way to survive, emotionally and financially.
Cheers,
Tim.
