This document compares inventory control models in SAP and conventional methods. It discusses the reorder point (ROP) and economic order quantity (EOQ) models, as well as the minimum-maximum (Min-Max) model used in SAP. The document uses a case study of inventory for special grease to illustrate how the different models apply and compare total costs. It shows that the standard ROP model is not always appropriate when buying costs are low due to multi-item purchase orders. In these cases, SAP's Min-Max model provides a better solution and lower average stock levels. Rules of thumb for Min-Max levels can result in under or overstocking compared to optimized calculations.

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MRO Inventory Control in SAP
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Introduction
Conventional inventory control in most text books on the subject
highlight ROP and EOQ
Many people also talk of Min-Max; when they are actually
referring to ROP
How to determine ROP in SAP depends on whether you use
LOT type HB or FX
SAP also has a lot of functionality relating to inventory control
In this brief ppt, we compare conventional ROP and Min-Max
with SAP terminology

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Glossary Inventory Analysis Terms
Abbreviation Comments
BC Buying cost, the cost to raise and process a PO
EOQ Economic Order Quantity or OQ for order quantity
HC Holding cost, the cost incurred for holding stock per year.
Expressed as a %, e.g. 20%
LTDR Lead Time Demand Rate, the estimated quantity that will be
used in the lead time
SS Safety Stock
ADR Annual Demand Rate I,e estimated annual number of issues
QOO Quantity on order
QOH Quantity on Hand
ROP The QOH when a replenishment PR is triggered
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SAP Min-Max Model (Lot Size HB)
This model requires the following data:
Noun Value Comments
MRP V2 Means automatic reorder
ROP Value
Reqd
This value is set to ensure a minimum
order quantity. And before a PR is
created the stock must be below the
ROP
Lot Size HB Means order to Maximum stock (OQ
= Max-QOH+QOO)
Max Stock Value
Reqd
Typically LTDR + SS

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SAP ROP Model (Lot Size FX)
This model requires the following data:
Noun Value Comments
MRP V2 Means automatic reorder
ROP Value
Reqd
This value is set to provide a fixed
reorder quantity. And before a PR is
created the stock must be below the
ROP (Confirm)
Lot Size Type FX Based on EOQ, therefore need to
know the BC and HC
Fixed Lot Size Value
Reqd
Based on EOQ, therefore need to
know the BC and HC
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Example 1 Special Grease
This is an actual case study from a Maximo user, but is a good
example, the CMMS data is
ADR - 12
OQ - 20 drums
LT - 150 days
Max - 40
ROP - 15
AUP - 1200
Assume a Desired Service Level = 98%
We will also assume BC = $40 and HC = 20% and that multiple
line items are on the same purchase order

4. 7
ROP (FX) Analysis
This is the data in our analysis tool, note ROP is not valid as EOQ
is less than LTDR (LTDR = 4.5 and EOQ = 2.7)
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Case Study: Special Grease
As the ROP policy is not appropriate, the options are to either
to:
Increase EOQ, so that the OQ is greater than LTDR. This
means ROP is now appropriate, but is not the optimum or
Use an alternative policy, e.g. Min-Max
Note in the conventional ROP set up; as soon as the stock level
falls to the ROP level a PR is created (this is slightly different
from the way SAP works, where it needs to be below the ROP)

5. 9
ROP with Both ROP & OQ Increased
This is the analysis when
OQ and ROP are increased
This achieves a 50%
reduction in Average Stock
Level Value (ASLV) over
current practice
Note: we have proposed an
ROP value greater than the
optimum, so that we don’t
take too much risk, but this
is still a big saving on
current policy
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ROP (FX) with Only OQ Increased
In this example; we have left
the proposed ROP as the
optimum and only increased
the proposed OQ above the
EOQ
This provides a 65%
reduction in ASLV
We will use this to compare
to the Min-Max (as per SAP
HB type)

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Case Study Min-Max Analysis
As per slide 4, we set
MRP type = HB
Max stock is LTDR + SS = 4.5 + 4.4 = 9
ROP = Max - EOQ (9 – 2 = 7; (so in SAP terms; (this is a SAP
ROP = 8 , the level has to be below ROP to create the PR)
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Evaluate Current Policy, FX & HB
We can evaluate both current and the different options, remember
total cost of ownership is Item cost + Buying Cost + Holding Costs
The 37% savings shown above is the savings over the ROP
policy

7. 13
Rules of Thumb
During a recent training course, SAP user delegates said they use
the following formulas – these are rules of thumb and will result in
over or under stocking (as demonstrated in previous
presentations)
Max = 1.5 x Min Stock Level
Min = 2 x LTDR
Rules of thumb do not consider
Different unit costs
Different criticalities or service levels
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Summary
We have used a real case study from the oil & gas sector to
show how the ROP (FX) policy is not always appropriate, when
BC per line item is low due to multiple line items on the same PO
In this case a Min-Max policy (HB) is more appropriate. With this
policy we review the current balance at regular intervals and
replenish more frequently due to the lower EOQ
In the HB model the ROP or Min is used to ensure a minimum
order quantity, in this example 2 (the calculated EOQ)
Key is knowing the true Buying Cost (BC) and the average
number of line items on a specific supplier. BC will also vary
depending on whether the item is purchased in-country or from
overseas

8. 15
Contact
David Thompson
Ramsoft (UK) Ltd
dave@ramsoftuk.com
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