Forecast, Automatic Reorder

Point and Safety Stock

Calculation
February 15, 2015 by immoniks

SAP can calculate the reorder point and safety stock based on materials past
consumption. As mentioned inConsumption based planningCBP, there
are several prerequisites for this calculation.
First of all, the forecast must be executed (in MP30) and the reorder point
and safety stock will be proposed.
Recently, Ive been trying to crack how exactly these two values are
calculated. I have found many reading materials; unfortunately, none of
them could really answer my curiosity.
Apparently there are many values and statistic calculation involved. In this
post, I will try to share the knowledge I have built up so far.
To come up with the reorder point and safety stock, SAP bases this
calculation on the forecast of material consumption.
This forecast is, in turns, based on the historical consumption values (in
material master). To be able to execute forecast for a material, some settings
in the material master record (Forecast view) must be in placed which are
the following:
Period indicator: this specifies how the historical consumption values are
managed (daily, weekly or monthly).
A forecast model must be selected as well as the necessary model values
must be defined or initialised (basic value, trend value and seasonal indices
depending on the forecast model).
Historical consumption values must be recorded.
Now I will go further into the calculation, formulas and necessary settings.
In material master:

Period indicator: M for monthly. This means my period of historical

consumption is one month.
Forecast model: D for constant model. I have chosen this model for
demonstration because it is the simplest in terms of the formula used. Please
refer to SAP documentation for the formulas used in other types of forecast
model.
No. of historical period: 60 periods. This tells the system how many
periods of historical consumption values are relevant for the calculation of
the forecast. The system default is 60 periods. If, however, you dont have 60
historical values, the system will use just the periods you have.
Period f. init: 1 period. This instructs the system how many periods will be
used for the model initialisation. The model initialisation is the calculation of
basic values, trend values and seasonal indices. Depending on the forecast
model selected, the system initialises only the values that are needed for a
respective forecast model. Also, the number of periods needed for the model
initialisation varies depending on the forecast model. In my case, I have
selected D constant model, so at least 1 period of consumption value is a
prerequisite. And with the constant model, only basic value is the model
independent parameter. Please refer
tohttp://help.sap.com/saphelp_46c/helpdata/en/a5/6320e843a211d18941000
0e829fbbd/frameset.htm for model independent parameters and number of
periods needed for model initialisation.
Forecast period: 6 periods. This is the forecast horizontal. The system will
calculate the forecast for 6 periods in this case.
Initialisation indicator: X for automatic initialisation. This is used in
combination with Period f.init. This instructs the system to initialise the
model dependent parameter (only basic value in my case) for the first time
execution of the forecast. The system will then use the number of periods
specified in Period f.init to calculate the first basic value. If this indicator is
not set, you will have to maintain the basic value (and other model
dependent values) before the forecast execution.
Smoothing factor for basic value (Alpha factor): This factor is used
when smoothing the basic values from the previous period to the current
period. If you dont specify any value here, the system will use the default
value which is 0.2.
Lets see the formula for the constant forecast model (D).
Basic value (t) = Alpha*Actual consumption (t-1) + [1-Alpha]*Basic value (t1)

Where,
Basic value (t) is the basic value for the forecast period. It is actually your
forecasted consumption value.
Alpha is the smoothing factor of basic value.
Actual consumption (t-1) is your historical consumption from the previous
period
Basic value (t-1) is the basic value from the previous period.
The following is a demonstration:
Period

Actual Consumption

Basic values

Basic values

202.242

202.558

4.2011

220

197.802

198.197

3.2011

170

204.752

205.245

2.2011

210

203.44

204.056

1.2011

230

196.799

197.569

12.201

200

195.998

196.961

11.201

180

199.997

201.201

10.201

230

192.496

194

9.201

230

183.12

8.201

170

186.4

7.201

220

178

6.201

170

5.201

180

180

As stated above, I set model initialisation = X and my period for initialisation

= 1 period. The system normally calculates the basic value on the basis
of an average value. Since I specify 1 period for initialisation, the
consumption value of period 5.2010 is then my initialised basic value for
period 6.2010.
For period 7.2010, the formula for constant model is then used.
Basic value (7.2010) = Alpha*Actual consumption(6.2010) + [1-Alpha]*Basic
value (6.2010)
= 0.2*170 + [1-0.2]*180
= 178
Basic value (8.2010) = Alpha*Actual consumption(7.2010) + [1-Alpha]*Basic
value (7.2010)
= 0.2*220 + [1-0.2]*178
= 186.4
It continues the calculation up until period 5.2011 which is the period I want
to run the forecast for. And for the constant model, the forecasted value
remains constant in my forecast horizontal (which is 6 periods) until I
execute the next forecast.
So, now lets see if I change Period f.init from 1 to 5. This means I will use 5
periods of my historical consumption values to initialise my basic value. As
mentioned, the system calculates the basic value on the basis of an average
value. So, in my example, the consumption values from 5.2010 to 9.2010 will
be averaged to form an initialised basic value for period 10.2010.
Basic value (10.2010) = Average of consumption values from period 5.2010
to 9.2010
= (180 + 170 + 220 + 170 + 230)/5

= 194
The basic value of period 11.2010 to 5.2011 is then calculated using the
same method as the above.
Period

Actual Consumption

Basic values

Basic values

202.242

202.558

4.2011

220

197.802

198.197

3.2011

170

204.752

205.245

2.2011

210

203.44

204.056

1.2011

230

196.799

197.569

12.201

200

195.998

196.961

11.201

180

199.997

201.201

10.201

230

192.496

194

9.201

230

183.12

8.201

170

186.4

7.201

220

178

6.201

170

180

5.201

180

I would like to point out here one more time that I only demonstrate and
need the calculation of the basic values because I use the constant forecast

model (D). If it was a trend or seasonal model, other model independent

must be also calculated. Also, for model initialisation, it would be other
method for initialising the trend value and seasonal indices.
In my system, the forecasted basic value is rounded up to be a forecasted
value for the forecast horizontal. So, in this case, my forecasted consumption
is 203 regardless of how many periods I have used for model initialisation.
It is worth to mention that this activity of forecasting the past periods is
called ex-post forecasting. This happens when you have more consumption
values than what is needed for model initialisation.
Reorder point calculation
Now that we have our forecast value, lets look at how this is involved in our
reorder point and safety stock calculation.
The formula for reorder point is:
Reorder point = Lead time * Forecast (in days) + Safety stock
Where,
Lead time = total lead time of the material. Please refer to Consumption
based planningCBP
Forecast (in days) = the forecasted consumption value on a daily basis. In
my example, I use period indicator M for monthly which means that I have to
convert my monthly forecasted consumption into a daily consumption. I do
that by dividing my forecast value with 21.4 (working days).
Safety stock = safety stock calculated by the system. I will explain this a
little later. Now lets just assume that our safety stock is 0.
Lets say I have a lead time of 3 days (1 day each for purchasing processing
time, planed delivery time and goods receipt time).
Reorder point = 3 * 203/21.4 + 0.
= 28.46
= 29 (rounded up)
This basically tells us that we have an average consumption of 9.48 pieces
per day (203/21.4). It takes 3 days until the materials are available.
Therefore, a procurement order should be placed when you have 29 piece
left in your stock.

In an ideal case, if there is no turbulence to the delivery, your stock will be

refilled after 3 days, and all these 29 pieces will be used up. However, what if
there are delays in the delivery. That is why you have a safety stock to
ensure that you will be able to serve the demand in case something happens
with your procurement process.
In SAP,
Safety stock = R * Sqrt (W) * MAD
Where,
R = statistical factor determined by service level (specified in MRP 2 view).
For the service level below 50%, R is equal to 0. The following is the table for
factor R (from help.sap.com).

W = the ratio of lead time to forecast (in days) = lead time (in days)/forecast
(in days)
MAD = Mean average deviation.
We have now all the values to calculate the safety stock excepts for the
MAD. So, now let me show you how MAD can be achieved.
First of all, similar to calculating the basic values, MAD is calculated for
initialisation and for ex-post forecasting. Also, similar to the basic value, MAD
has also a smoothing factor which is called Delta and can be set in the
material master record (Forecast view). Otherwise, the default Delta of
0.3 is used in the calculation.
I will now demonstrate the calculation of MAD when we have 1 period for
model initialisation and 5 periods for model initialisation.
Lets first look at the formulas involved.
There are 2 formulas used in order to calculate the MAD values: one used to
initiate the first MAD and the other one is for determining the MAD for the
next period.
Lets start with MAD for initialisation.
MAD = Average |Actual consumption (i) G(init)|
Where,
G(init) = Average of the actual consumptions for the periods for initialisation.
i = 1 to the period for initialisation.
MAD for forecasting is then,
MAD (t) = Delta * |Actual consumption Basic values| + [1-Delta] * MAD (t1)
This looks very complicated. But I will demonstrate the calculation in table
format below. It is actually simple if you use excel.
Again, I will show the calculation when using 1 period for model initialisation
and 5 periods for model initialisation.
Period f.init = 1 period
G(init) = Average of the actual consumptions for the periods for initialisation

= 180
MAD(init) = Average |Actual consumption (i) G(init)|
= 180 180
=0
Therefore, MAD for period 6.2010 = 0.
The formula for MAD for ex-post forecasting applies from period 7.2010
onwards.
MAD(7.2010) = Delta * |Actual consumption (6.2010) Basic values (6.2010)
| + [1-Delta] * MAD (6.2010)
= 0.3 * |170 180| + (1-0.3) * 0
= 0.3 * 10
=3
MAD(8.2010) = Delta * |Actual consumption (7.2010) Basic values (7.2010)
| + [1-Delta] * MAD (7.2010)
= 0.3 * |220 178| + (1-0.3) * 3
= 0.3 * 42 + 0.7 * 3
= 14.7
Perio
d

Actual
Consumpt
ion

Basic
value
s

Absolute Error

202.2
42
4.20
11

220

197.8
02

G(ini
t)

Absolute(Act
ual
Consumptio
n G(init))
22.9
94

22.198

23.3
35

3.20
11

170

204.7
52

34.752

18.4
42

2.20
11

210

203.4
4

6.56

23.5
34

1.20
11

230

196.7
99

33.201

19.3
9

12.2
01

200

195.9
98

4.0020000000
0001

25.9
84

11.2
01

180

199.9
97

19.997

28.5
49

10.2
01

230

192.4
96

37.504

24.7
11

9.20
1

230

183.1
2

46.88

15.2
1

8.20
1

170

186.4

16.4

14.7

7.20
1

220

178

42

6.20
1

170

180

10

5.20
1

180

Period f.init = 5 periods

180

This is how it looks when you use 5 consumption values for model
initialisation.
G(init) = Average of the actual consumptions for the periods for initialisation
= (180 + 170 + 220 + 170 + 230)/5
= 194
MAD(init) = Average |Actual consumption (i) G(init)|
= (|180-194| + |170-194| + |220-194| + |170-194| + |230-194|)/5
= (14+24+26+24+36)/5
= 24.8
Therefore, MAD for period 6.2010 = 24.8.
The formula for MAD for ex-post forecasting applies from period 11.2010
onwards.
MAD(11.2010) = Delta * |Actual consumption (10.2010) Basic values
(10.2010) | + [1-Delta] * MAD (10.2010)
= 0.3 * |230 194| + (1-0.3) * 24.8
= 28.16
MAD(12.2010) = Delta * |Actual consumption (11.2010) Basic values
(11.2010) | + [1-Delta] * MAD (11.2010)
= 0.3 * 21.201 + (1-0.3) * 28.16
= 26.073
Perio
d

Actual
Consumpti
on

Basic
values

Absolute (Actual
consumption
Basic value)

202.5
58
4.20
11

220

198.1
97

Absolute(Actua
l Consumption
G(init))
22.7
55

21.803

23.1
63

3.20
11

170

205.2
45

35.245

17.9
84

2.20
11

210

204.0
56

5.943999999999
99

23.1
44

1.20
11

230

197.5
69

32.431

19.1
63

12.2
01

200

196.9
61

3.038999999999
99

26.0
73

11.2
01

180

201.2
01

21.201

28.1
6

10.2
01

230

194

36

24.8

9.20
1

230

36

8.20
1

170

24

7.20
1

220

26

6.20
1

170

24

5.20
1

180

14

Now we can finish our safety stock calculation.

Assume,

Service level = 95%. Factor R is then equal to 2.06 according to the Factor R
table above. And MAD = 22.755.
From,
Safety stock = R * Sqrt (W) * MAD
= 2.06 * Sqrt (3/(203/21.4)) * 22.755
= 14.824
Now I must admit I am having trouble getting the right value for W. According
to SAP, it is the ratio of delivery time to the forecast value in days (W =
delivery time/forecast). But, I am not sure if it is work days or calendar days
here. :p
However, SAP would get the value of 17.539 for the safety stock with this set
of data and setting. I would say missing by 3-4 pieces is not that

critical?
Recall from the reorder point calculated above:
Reorder point = Lead time * Forecast (in days) + Safety stock
Reorder point = 3 * 203/21.4 + 14.824.
= 43.284
As reference, SAP proposes 45.897.