Generating Inventory Policies

This chapter provides an overview of policy generation and calculations and discusses how to set up and generate inventory policies.

Understanding Policy Generation

Use the Generate Policy process (DP_CALCPOLCY) to create time-phased and static inventory policies for all items that are associated with a policy set. Time-phased data is the period-by-period values and quantities that are associated with items, while static data is calculated from period values to arrive at a single value quantity for the policy.

Normally you use a forecast and a set of policy methods to calculate policy values for each policy item, including values for safety stock, order quantity, reorder point, and minimum and maximum inventory level. You can also create policies using data that currently exists for policy items in PeopleSoft Inventory Policy Planning.

During processing, the system processes data separately for each period according to the policy set calendar. If the system encounters exceptions or errors during policy generation, it creates Work Queue alerts.

After generating policy values, you can publish them to PeopleSoft SCM or for use in external systems. PeopleSoft Inventory uses the static data while PeopleSoft Supply Planning uses the time-phased data. You can also publish the policies to third-party systems.

During policy generation, the system performs a variety of conversions and calculations using the parameters that you define on the policy set, the policy master item, or the policy control group. Use the Generate Policy page to set up and run the generation process.

This section discusses:

• Inventory policy parameters.

• Policy set parameters.

• Low-level code calculations.

• Policy generation.

Inventory Policy Parameters

When you create an inventory policy, PeopleSoft Inventory Policy Planning converts the forecast demand so that it matches the relevant inventory policy periods; then it performs a series of calculations. The methods that are assigned to the policy master and control group determine which calculations are used. The system calculates these inventory policy parameters:

• Safety stock.

• Order quantity.

• Reorder point.

• Minimum and maximum.

• Service level.

• Stock turns.

• Average inventory.

• Cost and investment data.

Policy Set Parameters

Each policy set contains specific parameters, which link to other control records. You define additional policy calculation controls when you generate the policy. The system uses these parameters during policy generation:

• Maximum periods.

  Controls the maximum number of periods for which the inventory policy is developed. The policy set’s calendar and period codes determine the length of each period.

• Start period/year.

  Determines the starting period and year for inventory policy development. The system maintains period number and year on the policy set. The system updates these values when you select to roll forward period. This keeps the policy set's start period and year synchronized with the published forecast that it's using during policy generation.

• Variance law periods.

  Provides formulas that the system uses to calculate the forecasting error for periods with low demand history. The system uses the formula instead of the standard error calculation to produce a more accurate forecast error.

  For periods with low demand history, the PeopleSoft Demand Planning standard error calculation that is used to determine policy values may not be valid. In this case, the system uses a variance law to calculate the forecasting error.

  This is the calculation for variance law periods:

  .82 * (APFD)∧.75

  where APFD = Average Period Forecast Demand = Annual Forecast Demand/Number of Periods.

• Policy Control Group.

  Defines the control group. A policy set may have one or many different policy control groups. The system uses the policy control group that you define for the policy set to populate reorder and stocking policies for new items when you transfer the forecasts and generate the policy. When you generate the policy, you can use the default value for the control group or select another group.

• Calendar ID and period code.

  Determine which calendar the system associates to the policy set. This determines the start and end dates for each inventory policy period.

  One set of policy values is created for each period. When forecast and inventory policy periods are different, the system determines how much demand from the forecast period is attributable to the inventory policy period.

  For example, if the forecast period is monthly and the policy period is weekly, to convert the calender from monthly to weekly, the system:

  1. Totals the calendar weights for the month.

  2. Divides the weight total into the total demand for the month to arrive at a daily value.

  3. Multiples the daily value by the number of days in the week to arrive at the weekly value.

• Forecast view and level.

  Determine the source of an item’s forecast. The view and level, in addition to the selection criteria that you define for the policy set, control which forecast records are transferred to PeopleSoft Inventory Policy Planning. Multiple forecast items within a policy set can also be linked to an inventory policy item.

• Forecast.

  Identifies the forecast data set that is to be used for the transfer of the published forecast into this policy set. If the adjusted forecast is used, then the system uses the associated adjusted forecast deviation error in the applicable safety-stock calculations. If the statistical or prorated forecasts are used, the related forecast deviation is used. If a user-adjusted forecast set is used, the system uses the adjusted forecast deviation.

Low-Level Code Calculations

Low-level codes are integer numbers that tell the system the lowest level at which the component appears across all bills of material (BOMs). These BOMs are groupings of items in a bill of material format. PeopleSoft Inventory Policy Planning uses the code to determine the order in which it processes items so that dependent demand for intermediate products (subassemblies) are properly calculated.

During policy generation, the system automatically rebuilds low-level codes when PeopleSoft Inventory is in use and you select to rebuild low-level codes.

PeopleSoft Supply Planning uses the effective dates on the BOMs to calculate the replenishments for time-phased, finished-good items. Based on the date for the replenishment, Supply Planning uses the BOM that is effective for that date. Effective-dating of the BOMs makes it possible to time-phase material demand requirements into the future.

The system calculates the dependent demand by taking the forecast and exploding it down through the BOMs in effect for that period. It loads the components of those BOMs that are in effect as well. This establishes inventory policies for future periods.

See Also

Maintaining Bills and Routings

Policy Generation Process

You can use one or multiple options to generate an inventory policy. If you select all of the options to perform the generation, the system:

1. Transfers the forecast.

   You can use different calendars for a forecast and a policy set.

   As the system transfers the forecast, it:

   1. Extracts a statistical, adjusted, prorated, or user-adjusted forecast from the forecast item master using the policy set's view and level.

   2. Converts the forecast to inventory policy periods and the inventory policy item unit of measure.

   3. Transfers the applicable forecast deviation (forecast error) and the effective demand periods to the item’s record.

2. Performs these actions as it transfers the forecast:

   • Creates new policy items.

     If an item is missing and you selected the Create Missing IP Master option, the system uses the default policy control group’s policies to create a new inventory policy master item and Work Queue alert (where applicable).

   • Updates period costs if selected for policy generation.

   • Transfers data from user-defined fields if selected for policy generation.

3. Rebuilds low-level codes to determine the lowest level at which a bill of material component resides on the BOM.

4. Explodes and creates demand for child items.

   If you select Explode and Create Demand, the system explodes the active BOM for each item to extract component items and computes the dependent demand for each item.

   Demand for components is assumed to occur in the same policy period as their parent items. The system uses the effective date for the BOM to determine which bill is in effect. Individual lines on the BOM also have effective dates, and the total demand for the policy period in which the effective date falls is used for the calculation.

   The system doesn't attempt to prorate values within a period. For example, when the policy period is set for monthly periods and a new component is set to become effective halfway through that month, the total forecast for the month is used for calculations. If the forecast was 2,500 for the parent item, then the new components forecast will be relative to that forecast value rather than being prorated to half that value. In this way, the safety-stock values accurately calculate the required quantities.

   If the component was a one-to-one relationship to the parent, then the component forecast would also be 2,500. So if the order quantity was set to 15 days supply, the order would calculate 1,250 for that order quantity as opposed to 625, which would cover only seven days worth of the forecast.

5. Extracts policy methods.

   All policy methods and arguments are extracted from the policy items.

6. Computes inventory policy values.

   For each policy item, the system:

   1. Accumulates the annual demand.

   2. Accumulates the total demand for all forecast periods.

   3. Calculates the variance law.

   4. Calculates order quantities and their associated limits.

   5. Calculates safety stock and its associated limits.

   6. Calculates reorder points.

   7. Calculates minimum and maximum stock levels.

   8. Calculates static values using the results of the policy parameter calculations.

   9. Calculates the derived values for service fill, stock turns, and average inventory.

   10. Calculates the annual costs, including investment, orders per year, and carrying costs.

7. Updates the policy item using the results of the calculations in step six.

Understanding Inventory Policy Calculations

During policy generation, the system uses control parameters, values from forecasts, and period data to determine time-phased and static values for inventory policies.

This section discusses:

• Order quantity policy calculations.

• Safety-stock policy calculations.

• Reorder point policy calculations.

• Derived values.

Order Quantity Policy Calculations

Order quantity calculations determine the quantities of an item that should be ordered each time the item is to be replenished. Fixed quantity methods include those methods where the order quantity equals the fixed order quantity argument.

This section discusses:

• Days supply calculations.

• Economic order quantity (EOQ) calculations.

• Lot for lot calculations.

Days Supply Calculations

This calculation defines the order quantity by the number of days supply that you want for an item.

This table lists calculations that apply to days supply order quantities:

EOQ Calculations

This calculation establishes a fixed-order quantity that minimizes the cost of processing the replenishment and carrying inventory.

This table lists the calculations that apply to EOQ order quantities:

Lot for Lot Calculations

This calculation is designed to order exactly what is needed to satisfy the immediate demand for the lead time.

This table lists calculations that apply to lot for lot order quantities:

Safety Stock Policy Calculations

Safety-stock calculations set an inventory level that protects you from the variability of demand that is indicated by the forecast error. The calculation determines the quantity of inventory that is needed to satisfy demand in excess of the forecast during lead time. Safety stock for each period is adjusted according to any upper and lower limits that apply to the period.

This section discusses:

• Days supply - safety stock calculations.

• Demand fill calculations.

• Cycles without stockout calculations.

Days Supply - Safety Stock

This calculation results in a specific number of days of forecast demand for an item. The days supply calculations for safety stock are the same as the Days Supply method that is used with order quantity.

In the calculation, the system uses lead time to offset the demand. For example, if the demand for periods one and two are 50 and 5000 respectively, and the lead time is 30 days, then the order quantity that the system calculates for period one is relative to the forecast for period two. Thus, if the order method is set for 15 days supply, the order quantity that the system calculates for period one would be 2,500, not 25. In this way, when the order is recognized for replenishment in period one and 30 days later it is finally received, the received quantity should cover 15 days of demand.

See Order Quantity Policy Calculations.

Demand Fill Calculations

This calculation sets safety-stock levels at a particular service level to prevent running out of inventory.

This table lists calculations that apply to demand fill calculations:

Cycles Without Stockout Calculations

This calculation establishes inventory levels so that the percentage of inventory cycles that you define occurs without creating a shortage.

This table lists calculations that apply to cycles without stockout:

Reorder Point Policy Calculations

Reorder point calculations determine the inventory level at which to launch a replenishment order.

This section discusses:

• Days supply - reorder point calculations.

• Lead-time calculations.

• Lead-time plus safety stock calculations.

Days Supply - Reorder Point Calculations

This calculation sets the reorder point as a specific number of days supply of this item’s forecast. The days supply calculations for the reorder point are the same as those for days supply using order quantity calculations.

See Order Quantity Policy Calculations.

Lead-Time Calculations

This calculation sets the reorder point as the level of inventory that is required to meet forecasted demand during the lead time. The reorder point lead-time calculations are the same as those that determine days supply for order quantities, with the following exception: Days supply n is set equal to the lead time (LT). Lead time is measured only in days.

See Order Quantity Policy Calculations.

Lead-Time Plus Safety-Stock Calculations

This calculation sets the reorder point as the level of inventory that is required to meet forecasted demand over the lead time plus the safety stock of the item. The lead-time plus safety stock calculations are the same as those that determine days supply for order quantities, with the following exceptions: Days supply n is set equal to the lead time (LT), and produces Qty(p).

ReorderPoint(p) = Qty(p) + SafetyStock(p).

Lead time is measured only in days.

See Order Quantity Policy Calculations.

Derived Values

Derived values are calculations that the system makes in addition to those that it makes for policy methods. These values provide results of calculations for time-phased and static data that you must analyze to determine the effectiveness of the inventory policies.

After you generate a policy, the system uses derived values for simulations, inquiries, and reports. You can publish derived values to PeopleSoft SCM where Inventory uses the static values and Supply Planning uses the time-phased values.

This section discusses:

• Service-level calculations.

• Average inventory calculations.

• Inventory turns calculations.

• Costs calculations.

Service-Level Calculations

This derived-value calculation uses service goals to determine the probability of meeting total demand during the lead-time.

This table lists the calculations that determine service-level reorder points:

Average Inventory Calculations

This derived-value calculation determines the average inventory based on period-by-period data.

This table lists the calculations that provide period averages:

Inventory Turns Calculations

This derived-value calculation defines the number of times, on average, that inventory is replaced in one year.

This table lists calculations that determine the inventory turn value:

Costs Calculations

This derived-value calculation determines values for cost- and investment-related fields.

This table lists calculations that determine how the system arrives at the annual investment in the policy item, annual ordering and holding costs, and the number of orders per year:

Setting Up and Generating Inventory Policies

After generating policies, use the Review Policy Information feature to review the calculation results. Also, use the Inventory Policy Items feature to modify policies.

Note. Changes that you make to policies in the Define Policy Items page don't become active until you apply simulation changes or generate another policy for the item, by selecting the Update Policy check box for the processing.

This section discusses how to set up and generate inventory policies.

Page Used to Set Up and Generate Inventory Policies

Setting Up and Generating Inventory Policies

Access the Generate Policy page.

The system constructs the 18-character planning item code based on the values of the user-defined fields that you select in the Define Item Code grid on the DP Interface page. The planning location is constructed based on the five-character value of the Define Location field.