1. Using Supply Chain Planning Common Features
  2. How Shrinkage Is Calculated

How Shrinkage Is Calculated

The planned quantities of products sometimes decrease or shrink as they move through the production process. Shrinkage rate is an item-organization attribute, which determines the expected scrap and other losses in inventory.

To overcome the inventory shrinkage, the planning process begins with production quantities greater than the required quantity to meet the demand. The planning process considers the value that you specify for shrinkage and uses it to plan for shrinkage of an item in an organization. The planning process plans for demand by starting with a quantity that considers shrinkage and then arrives at the required order quantity. The order quantity is the quantity after the shrinkage is applied. The planning process uses the shrinkage rate and the required order quantity to determine the start quantity. The planned order needs the start quantity to account for the shrinkage.

The planning process derives the start quantity based on the following equation:

Start Quantity = Order Quantity / (1 - Shrinkage)

For example, consider an item that has a shrinkage of 10%. For a demand of 100, the planning process starts with a quantity that will shrink by 10% to arrive at 100.

Start Quantity = 100 / (1 - 10%) = 111.11

If the Apply Order Modifier to Start Quantity item attribute is set to Yes, then the start quantity will be adjusted to conform to the applicable order modifier and the order quantity will be calculated based on the following equation:

Order Quantity = Start Quantity * (1 – Shrinkage)

For example, consider an item that has a shrinkage of 10% and a fixed order quantity of 100. For a demand of 100, the planning process first creates a planned order with a start quantity of 100 (which conforms to the Fixed Order Quantity order modifier) and an order quantity of 90 (due to 10% shrinkage). Because 10 more are needed to fulfill the demand, a second planned order is created with a start quantity of 100 (which conforms to the Fixed Order Quantity order modifier) and an order quantity of 90, of which 10 are needed to meet the demand and 80 are available for another demand or go unused.

Shrinkage is also applied when collecting data from an external source system. When uploading purchase requisitions, purchase orders, or work orders using the file-based data import (FBDI) template, the planning process applies any specified shrinkage rate and reduces the order quantity. For example, if an item has a shrinkage of 10% and the order quantity in the .csv file for a purchase requisition is 100, then the order quantity is reduced to 90 when the purchase requisition is uploaded.

The supply planning process considers shrinkage for both planned orders and existing supplies.

Firming Supplies

When you firm a supply order, you can select either the start quantity or the order quantity as the firm quantity on the Supplies and Demands table. You can update either the Firm Quantity or the Firm Start Quantity column to a different value.

When you firm a planned order, the planning process updates the Firm Quantity column with the value in the Order Quantity column. You can also edit the Firm Quantity column based on your planning needs. Alternatively, you can specify the Firm Start Quantity column on a firm planned order. When you enter a value in the Firm Start Quantity column, the planning process clears the value from the Firm Quantity column.

When you rerun the plan in a simulation mode, you can see the following data:

  • For the planned order with Firm Start Quantity specified, the Start Quantity column displays the Firm Start Quantity value. The Order Quantity column displays a value based on the following calculations:

    Order Quantity = Firm Start Quantity * (1 - Shrinkage)

  • For the planned order with Firm Quantity specified, the Order Quantity column displays the Firm Quantity value. The Start Quantity column displays a value based on the following calculation:

    Start Quantity = Firm Quantity / (1 - Shrinkage)

Calculating Shrinkage for Work Orders

A work order can be fully complete or partially complete during collections. When you collect a work order, the collected quantity represents the start quantity. The planning process calculates the new order quantity based on the current state of completion and the expected scrap.

Because work orders can be incomplete at the time of planning, you can track the status of the work order from the Supplies and Demands table in your Supply Chain Planning work area. You can review the following attributes to track the status of the work order:

  • Start Quantity

  • Completed Quantity

  • Scrapped Quantity

  • Remaining Quantity

  • Expected Scrap Quantity

  • Order Quantity

During collections, the planning process collects the start quantity from the execution systems. When you release a planned order, the planning process releases the start quantity back to the execution systems.

Measures to View Start Quantity

The following three predefined measures let you view the start quantity and the start dates:

  • Supply Start Quantity

  • Reserved Supply on Start Date

  • Reserved Supply Value on Start Date