Stocks involve costs: - Stock-out cost: the cost of not having a spare in stock when you need it - Cost

of ordering: the cost of finding a supplier and the administration of ordering - Cost of storing: the cost of storing spares (financial charges, storing space, ) This article explains how to calculate the ideal stock size and order size for different types of spares in order to minimize those costs. It helps you to prevent unwanted out-ofstock situations and understand the inventory management module of your CMMS.

TABLE OF CONTENTS
1 2 INTRODUCTION ......................................................................................................................................... 1 CLASSIFICATION OF MAINTENANCE SPARES................................................................................. 2 2.1 CLASSIFICATION OF MAINTENANCE SPARES BASED ON THE NATURE OF THE SPARE................. 2 2.1.1 Specific parts..................................................................................................................................... 2 2.1.2 Standard parts................................................................................................................................... 2 2.1.3 Consumables and sundries............................................................................................................... 4 2.2 CLASSIFICATION OF MAINTENANCE SPARES ACCORDING TO THEIR CONSUMPTION .................. 4 2.2.1 Slow Movers ...................................................................................................................................... 4 2.2.2 Fast Movers....................................................................................................................................... 4 3 ADDITIONAL FACTORS WHICH AFFECT STOCK CONTROL ....................................................... 5 3.1 DEGREE OF REGULARITY OF CONSUMPTION .................................................................................... 5 3.2 RELATION BETWEEN CONSUMPTION AND MAINTENANCE FORM .................................................. 5 3.2.1 Spares for Preventive Maintenance .................................................................................................. 5 3.2.2 Corrective maintenance spares (including repairs and trouble-shooting) ....................................... 6 3.2.3 Design-out maintenance spares ........................................................................................................ 6 3.3 END USE OF CERTAIN TYPES OF MAINTENANCE SPARES ................................................................ 7 3.3.1 Spares for major overhauls and shutdowns ...................................................................................... 7 3.3.2 Repairable/rotable spares ................................................................................................................. 7 3.3.3 Commissioning spares....................................................................................................................... 8 4 HOW MUCH TO ORDER ? ........................................................................................................................ 9 4.1 4.2 5 5.1 5.2 5.2.1 5.2.2 5.3 5.3.1 5.3.2 5.4 5.4.1 5.4.2 5.4.3 5.5 5.6 6 6.1 6.2 6.3 6.4 COST MINIMIZATION CRITERIA .......................................................................................................... 9 FORMULA FOR ECONOMIC ORDER QUANTITY (EOQ) ................................................................... 10 BASIC STOCK CONTROL MODEL ....................................................................................................... 11 ECONOMIC ORDER QUANTITY SYSTEM OR EOQ SYSTEM ............................................................ 12 Description of the EOQ System....................................................................................................... 12 Application of the EOQ System....................................................................................................... 13 FIXED REVIEW PERIOD SYSTEM OR P-SYSTEM .............................................................................. 15 Description of the Fixed Review Period System or P-System ......................................................... 15 Application of the P-System ............................................................................................................ 16 STOCK CONTROL MODEL FOR A POISSON (RANDOM) DISTRIBUTION OF DEMAND.................... 17 Explanation of the Poisson formula used........................................................................................ 18 Preparation of the Demand Level Table ......................................................................................... 18 Suggested method of using the Demand Level Table ...................................................................... 21 STOCK CONTROL MODEL FOR INSURANCE OR CAPITAL OR SECURITY SPARES......................... 22 CHOICE OF STOCK CONTROL MODEL.............................................................................................. 24 LEAD TIMES ........................................................................................................................................ 25 SERVICE LEVELS ................................................................................................................................ 25 SAFETY FACTORS............................................................................................................................... 27 SETTING REORDER LEVELS (EOQ) OR RESTOCKING LEVELS (P-SYSTEM) ................................. 27

STOCK CONTROL MODELS.................................................................................................................. 11

HOW TO SET REORDER LEVELS (EOQ) AND RESTOCKING LEVELS (P-SYSTEM) .............. 25

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BASIC QUESTIONS ANSWERED IN THE DOCUMENT "STOCK CONTROL THEORY FOR MAINTENANCE"
What are fast moving spares and slow moving spares ? What are specific parts, standard parts and consumables ? How does the chosen form of maintenance affect the stock control of a spare ? Which spares are worth following up individually ? Which spares can be dealt with by regularly spaced orders ? How does one deal with irregular demand for slow moving spares ? What is the Economic Order Quantity (EOQ) for a spare ? At what point does one place an order for fresh stock ? What is the Lead time for a spare ? What are Service Levels ? What are Safety stocks ? How does one use Safety Factors ? What are Capital or Insurance or Security spares ? See Chapter 2 Section 2.2 "Classification of Maintenance spares by consumption" See Chapter 2 Section 2.1 "Classification of Maintenance spares by nature" See Chapter 3 Section 3.2 "Relation between consumption and maintenance form" See Chapter 5 Section 5.2 "Economic Order Quantity or EOQ System" See Chapter 5 Section 5.3 "Fixed Review Period or P-System" See Chapter 5 Section 5.4 "Stock control model for a random distribution of demand" See Chapter 4 "How much to order ?" See Chapter 6 Section 6.4 "Setting Reorder Levels or Restocking Levels" See Chapter 6 Section 6.1 "Lead Times" See Chapter 6 Section 6.2 "Service Levels" See Chapter 6 Section 6.3 "Safety Stocks" See Chapter 5 Section 5.5 "Stock control model for Insurance or Capital or Security spares"

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STOCK CONTROL THEORY FOR MAINTENANCE

1 INTRODUCTION

Stock control, also known as inventory control, is one of the most important functions of any enterprise. The larger the company and the more versatile the range of products, the greater the problem of controlling the numbers and costs of raw materials and spares, semi-finished and finished goods, all of which comprise the "stocks" of a company. Stock control techniques for maintenance stores have been developed because, on the one hand there is the need to keep "in stock" certain quantities of material and spares in order to successfully respond to present and future production needs of a company, and, on the other hand, the costs of maintaining these same stocks is considered a non-productive expenditure which should be minimized as much as possible. Maintaining a balance between these two conflicting needs is the basis of stock control. Stock control has, therefore, become critical to the financial health of any enterprise. Enterprise Resource Planning or ERP programmes deal with the overall materials and spares requirements of a company, starting with the input side, from materials planning for production needs, and following the process all the way to the sales outlets. Many feedback loops are included in the ERP programmes in order to constantly monitor and correct supply and demand requirements. Stock control is part of ERP. Many adaptations of existing theories have been developed to optimize techniques of stock control, almost all of them based on mathematical models and statistical methods of analysis. The use of computerized algorithms has resulted in complex formulas to calculate ordering quantities, delays, optimum stock levels, etc. To help maintenance management to deal effectively with stock control, almost all modern computerized maintenance management systems (CMMS) possess stock control modules which can make use of these complex formulas if they are fed the required information. For the maintenance manager who does not have access to a CMMS and has neither the time nor the need for complex theoretical calculations, it is much more useful to have a practical step-by-step approach which only uses those stock control parameters which are either measurable, can be easily calculated or can be estimated. For those maintenance managers who have access to a CMMS but would like to understand more about the base mathematical models used to manage the stock control parameters, this document explains the most relevant basics of stock control.

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CLASSIFICATION OF MAINTENANCE SPARES

One of the major difficulties with stock control of maintenance spares is that, unlike production raw materials which are driven by product demand - either "order driven" (pulled) or "production driven" (pushed) - and can, therefore, be easily calculated or estimated, maintenance requirements are driven by a large number of factors, not all of which are easy to calculate or forecast. For maintenance spares it is necessary not only to consider the nature of the spare and it's annual consumption, but also to consider the degree of regularity of consumption, since it is easy to see that, even though a spare may be considered fast moving (average of 3 or more items consumed annually), the pattern of consumption for the item may be highly irregular, hence, finding a suitable stock control model to manage the item may be very difficult. Therefore, for the choice of a suitable stock control model, it is necessary to understand how the following factors affect the way maintenance spares are consumed : the nature of the spare (category of spare), the level of consumption (whether fast or slow moving), the regularity of demand for the spare (whether demand is regular or irregular ), the relationship between consumption of the spare and the form of maintenance for which the spare is intended, - the end use of certain types of spares.

The first two factors form the basis of the classification of maintenance spares and are dealt with in this chapter. The remaining three factors are dealt with in chapter 3. 2.1 Classification of maintenance spares based on the nature of the spare.

Maintenance spares generally fall into one of the following three categories : - specific parts which are specific to an installation an equipment or a machine ; - standard parts which correspond to internationally recognized standards and which are interchangeable with other makes of the same part ; - consumables and sundries. 2.1.1 Specific parts Specific parts of an installation, machine or device are specially manufactured as per design specifications of the Original Equipment Manufacturer (OEM) and are not normally interchangeable with parts of another make. Examples are machine frames, the main shafts of all rotating equipment, specialist electrical or electronic parts, cylinder heads, specialized castings, camshafts and levers, special gears, pistons and rings, connecting rods, etc 2.1.2 Standard parts

Standard parts are all those parts which possess characteristics defined by the various international standards and which are interchangeable with equivalent parts of another make.

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A standard part will also have several applications within a machine or a piece of equipment, or within a production area or plant. Standard parts are generally listed in manufacturers catalogues according to their dimensional characteristics and according to their principal specifications. Examples of standard parts are screws, nuts and bolts, pipe fittings, all types of fasteners, Orings, all types of hoses, lip-seals, bearings, electrical contacts, electrical motor brushes, relays, circuit breakers, vee belts, roller chains, etc.

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2.1.3

Consumables and sundries

Here, in order to avoid confusion with the category of standard parts, it is necessary to keep in mind the consumable aspect of the spares, i.e. the spare is used only once and is then considered to have been consumed in the sense that it cannot normally be removed, examined and reused or it is not repairable. This is why the following types of spares are included in this category, even though their characteristics may correspond to international standards : all types of lubricants and greases; welding rods and welding wire, metal cutting rods; angle iron, bar stock for turning, sheet steel and other general-purpose hardware; glass sheets, plywood, chipboard, general-purpose steel wire; electrical insulating materials, cartridge fuses; most types of common building materials, etc.

Other articles included in this category are : all types of paints; gasket materials, sealing compounds, adhesives, grinding compounds; cleaning materials and cleaning products; adhesives.

The term "sundries" refers to all items which are general-purpose items (not specific or standard parts) and which can be found in most maintenance stores. In most cases, these are available as off-the-shelf items in any wholesale market or in any shop which stocks industrial items. They do not have a specific or standard application.

2.2

Classification of maintenance spares according to their consumption

2.2.1 Slow Movers These are spares with low annual consumptions (i.e. an average annual consumption of less than 3.0). These articles may be specific as well as standard spares. Within this category one finds Insurance or Capital or Security spares. 2.2.2 Fast Movers These are spares with higher annual consumptions (i.e. an average annual consumption greater than 3.0). These articles may be specific or standard spares. Almost all consumables and sundries fall within this classification.

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3 3.1

ADDITIONAL FACTORS WHICH AFFECT STOCK CONTROL Degree of regularity of consumption

Consumables, by definition, are subject to fairly regular consumption, and, because of the higher quantities consumed, they invariably come under the classification of fast-moving spares. For the other two categories (specific and standard spares) the degree of regularity of consumption is much more difficult to define mathematically because : they may be subject to regular consumption if they are used for routine maintenance or servicing operations (these are fast moving spares which follow a Normal distribution of demand), they may be subject to irregular consumption but may be slow or fast movers, they may be subject to demand once a year if they are used only for annual shutdown maintenance operations (most of these spares are specially ordered), they may be subject to demand once every 'x' years if they are insurance spares.

Therefore, it is important to determine whether consumtion of maintenance spares is"regular" or "irregular" .

3.2

Relation between consumption and maintenance form

The form of maintenance for which a spare is intended also has a great influence on the pattern of consumption. We define three maintenance forms : - Preventive Maintenance, which includes Time-Based Maintenance (TBM) and Condition-Based Maintenance (CBM), - Corrective Maintenance, which includes Repairs and Trouble-shooting, - Design-out Maintenance 3.2.1 Spares for Preventive Maintenance 3.2.1.1 Time-Based Maintenance Spares for Time-based maintenance include all spares and materials used for routine maintenance and servicing operations. Since consumption varies with the running hours of an installation, most spares are consumed regularly and they normally come within the classification of fast moving spares. For these spares one can assume a Normal distribution of demand. Certain Time-based maintenance spares such as air filter elements may only require replacement once a year, the consumption is regular but the part comes within the classification of slow moving spares.

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3.2.1.2 Condition-Based Maintenance spares Condition-based maintenance requires the monitoring of some condition-indicating parameter of the equipment being maintained, because, although many equipment failures are not agerelated, most of them give some warning that the failure is in the process of occurring or is about to occur. In a lot of cases, as the signs of failure increase, corrective action can be scheduled in a way that minimizes the disruption to operations. However, in spite of the possibility of scheduling repair operations, these repairs cannot be considered as time-based (as in TBM) because the occurrence of failures is not regular. Consumption of spares for CBM repairs will, therefore, always follow a random pattern and the spares may be fast or slow moving. 3.2.2 Corrective maintenance spares (including repairs and trouble-shooting) Specific and standard spares which are used for all types of corrective maintenance operations may not follow any regular pattern of demand distribution. In this case of a standard spare such as a roller bearing, a particular bearing may have only one application within a plant. This will be classified as a slow moving spare with an irregular demand However, the identical bearing may be mounted on several types of equipment in a plant or in several locations on the same equipment. In this case, the demand per location for the bearing will be slow moving and random, but the annual consumption of the bearing may have increased because of the number of bearing applications and the severity of operating conditions. The spare then becomes a fast mover with an irregular demand. Therefore, when deciding which stock control model to use, the stock controller must try to estimate annual consumptions by taking into consideration the number of times the same spare is found on equipment in a plant. Whenever possible, he should modify his estimate as per the operating conditions for the spare. 3.2.3 Design-out maintenance spares The aim of design-out maintenance is to improve the operation, the reliability or the capacity of an equipment. This sort of work takes time and involves studies, engineering, construction, installation and start-up. Once the improvements have been engineered, the stock controller's first task is to check if certain maintenance spares are no longer necessary or if they can be utilized for other applications. In certain cases, these spares can become "dead stock" that will be either sold or scrapped. His second task is to evaluate if new types of maintenance spares will have to be ordered specially as a result of the equipment modifications.

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3.3

End use of certain types of maintenance spares

The above four classifications cover almost all maintenance spares used for routine maintenance operations. However, there are also maintenance spares not destined for routine maintenance operations, for which stock control models have to be chosen. Specifically, these spares are: - spares for overhauls/shutdowns, - repairable/rotable spares, and, - spares for commissioning. 3.3.1 Spares for major overhauls and shutdowns

Major equipment overhauls and annual shutdowns are not routine maintenance operations covered by one of the major maintenance forms. The aim of the annual shutdown is to carry out a maximum of major repairs and overhauls during a limited shutdown period of the production installations. Therefore, spares for overhauls and shutdowns are only required at fixed periods during the working year. The period of overhaul or shutdown, the duration of the overhaul and the required quantity of spare parts are usually pre-determined on the basis of existing maintenance experience and technical know-how, on the basis of available information on failures and problems with the machines and installations, as well as suppliers' recommendations. These spares are then managed via special purchase orders and do not enter into the normal stock control process. Note : Theoretically, since the quantities and lead times are known, overhaul spares are supposed to arrive exactly when needed, leading to a zero inventory situation. In practice, plant management prefers to avoid the risk of waiting for critical spares, so items are procured sufficiently in advance, leading to higher costs of storing. 3.3.2 Repairable/rotable spares Drive transmissions, pumps, engines, electrical assemblies, electrical motors, hydraulic equipment, etc. contain certain components or sub-assemblies or machines, which, because of their high cost and because of the possibility of re-use, are not usually scrapped when they fail, but are repaired and stored for re-use. Examples of repairable spares are all types of pumps, electric motors, turbine shafts, hydraulic and pneumatic cylinders, engine blocks, crankshafts, cylinder heads, and many high value insurance spares. Repairable/rotable spares are individual components, individual sub-assemblies or individual machines which can be reconditioned or repaired after removal, then put back in service. Removal takes place either because the item has run for a fixed number of hours or because it has failed or worn out. After being reconditioned or repaired, the item is tested or checked, certified in proper working order and put back into service or into stock.

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In general, the stock controller will have to deal with 3 types of repairable/rotable spares : Single components which may be repairable using one of the various reconditioning techniques such as remetallizing or rechroming of worn out areas followed by a finishing process. Other spares such as gear drives, small water pumps or electric motors, are sub-assemblies or small machines which may only require the replacement of certain spares (in the form of individual spares or kits) in order to carry out repairs. Other spares such as hydraulic cylinders and multi-stage pumps, may require both types of operations.

Here, demand for spares will have to be worked out by the repair workshop, then communicated to the stock controller who will either incorporate the additional quantities in the normal re-ordering system or draw up special purchase requests. 3.3.3 Commissioning spares

Commissioning spares are normally purchased at the time of commissioning a new production installation. These spares are generally procured as part of the contract for the capital equipment purchase, and the lists of equipment spares are generally based on individual supplier's recommendations. Since they are destined to cover the periods of commissioning and initial operations, once the project has gone on stream, the stock of commissioning spares should theoretically be reduced to near zero. In practice, there is a certain amount of remaining stock which is then transferred to the regular stores. Those spares which are rarely consumed become, over a period of several years, either very slow moving stock, surplus stock, non-moving stock, etc. Demand for this type of spare is highly irregular. Note : When negotiating the contract for the purchase of capital equipment, the customer should try to limit the number of spares which remain after commissioning or he should negotiate some form of buy-back clause for all remaining unwanted commissioning spares.

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4 4.1

HOW MUCH TO ORDER ? Cost minimization criteria

Stock control is concerned not only with the direct cost of acquisition of spares and materials but also with the costs which are incurred by maintaining these spares and materials in stock. None of these costs add any value to the finished product, which is why stock control efforts are directed at minimizing these costs and why the cost minimization criterion has become the most generally accepted basis of present day stock control model. Three cost parameters are generally involved: - the cost of ordering Co , - the cost of storing Cs (also known as the stock carrying cost or the cost of ownership), - the stock-out cost Cso . The first two are direct costs and can be calculated or estimated, the third cost is an indirect cost which is often very difficult to estimate. Cost of Ordering Co This is the cost a company has to bear every time it places an order, such as administration or paperwork costs (book-keeping, data processing, computing, rents, telephone, ...), as well as reception, inspection, and quality control costs. In order to minimize these costs, the company must reduce the number of orders by grouping orders as much as possible. Here, the assumption is that costs of ordering are fixed costs and do not vary with the number of items ordered (at least within certain limits). Cost of Storing Cs (Stock carrying costs or ownership costs) This is the cost of possessing and holding stocks during any given period (days, weeks, months, years, ...). There are two types of costs: Out of pocket costs and opportunity costs. The former are costs that are paid in hard cash, the latter are costs that could have been prevented by better inventory management. Out of pocket costs are due to: - the costs of maintaining and preserving materials which can be easily damaged, - the costs of leakage, spoilage, shrinkage, evaporation, obsolescence, theft, , etc. - physical act of maintaining the store room - heat - lighting - insurance Opportunity costs occur because: - the capital that is tied up in stock is not generating interest - building costs and the costs of providing adequate storage space, storage equipment, etc.,

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Stock-out Cost Cso Whenever a spare part cannot be supplied from stock, part of the production line may stop and loss of production will result. Additional costs will be incurred if spares are ordered urgently. These indirect costs, resulting from the unavailability of spares, are called the stock-out costs. 4.2 Formula for Economic Order Quantity (EOQ)

The primary aim in determining the right quantity to order or Economic Order Quantity (EOQ) is to ensure that the sum of both direct costs (cost of ordering and cost of storage) are the minimum possible. The formula that is used to calculate the Economic Order Quantity EOQ is called the Wilson formula. This is calculated in the following manner, where : Q D = Quantity to order = Annual demand in units Co = Ordering cost per order Cs = Cost of storing expressed as a % of the stock value or as a % of the unit price of the item

1) The ordering cost per annum = total number of orders (D/Q) x cost per order D D = x Co= Co Q Q 2) Mean quantity in stock = Average stock level = Q/2 3) Cost of storage = Storage cost Cs (as percentage of unit price) x (Ave stock level) = Cs
Q 2 4) It can be seen that as Q decreases, the number of orders has to increase and the costs of ordering will increase. On the other hand, when Q increases, the total costs of storing increase. The objective is to make the sum of both these costs an optimum, i.e. when the total cost

C = Cs

Q D + Co = minimum cost , 2 Q

or, as can be seen from the total cost curve, when the slope of the total cost curve is zero, dC i.e. the derivative = 0 or, dQ Q D Cs 1 2 d d Cs +1 dQ (Cs 2 + Co Q ) = 0 or dQ ( 2 .Q + Co.D.Q ) = 0 or 2 Co. D.Q = 0 which gives

Q2 =

2 DCo or Q = EOQ = Cs

2 DCo Cs
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STOCK CONTROL MODELS

Modern methods of computerized stock control have become more dynamic, reaction times for adjustments to stock levels have been decreased, reviews of stocks can take place at greater frequencies, inventories can be monitored continuously, purchasing orders can be linked to existing and future maintenance needs, comprehensive stock situations are available on-screen whenever a stock control decision has to be taken, and stock control decisions can be taken on the basis of a greater number of parameters. This chapter will deal with four stock control models : the Basic stock control model from which other stock control models have been developed; the Economic Order Quantity System or EOQ System (for higher cost, fast moving spares which follow a regular or irregular pattern of consumption, and higher cost, slow moving spares which follow a regular pattern of consumption); the Fixed Review Period or P-System (for lower cost, fast or slow moving spares which follow a regular or an irregular pattern of consumption); the Poisson (random) Stock control model (for higher cost, slow-moving spares which follow an irregular pattern of consumption).

Detailed explanations are given to show the behaviour patterns of each of the stock control models under conditions which are normally encountered during maintenance operations when demand for spares is regular or irregular, lead times are short or long, etc. Section 5.5 also contains information on how to deal with the problem of Insurance or Capital or Security spares. Note : The terms higher or lower cost refer either to the purchase cost of an item, the cost of storing, or to the monetary value of the annual consumption of the item.

5.1

Basic stock control model

The basic stock control model is based on a fairly simple and repetitive sequence where : consumption of materials or spares occurs at a constant rate over any period of time (Normal distribution); orders are placed for calculated quantities at the re-order points (ROP) whenever stocks reach a level called the re-order level (ROL). all the ordered material arrives after the passage of a constant lead time, at which point the stocks have theoretically been reduced to zero; after stock levels have been replenished the cycle is repeated.

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The model is illustrated in the following diagram.

BASIC STOCK CONTROL MODEL Illustration of stock levels, lead time and order quantity using the basic stock control model

Order Quantity Q ROP

ROP

Stock Level

ROP

Reorder Level Average Stock Level Q/2

TIME Lead Time Delay Lead Time Delay Lead Time Delay

The main parameters to be managed are : how much should be ordered at each ROP, and, how many times should orders be placed over a fixed period of time.

This basic model of stock control does not provide an acceptable mathematical model since it makes a certain number of assumptions which do not work under real-life conditions, i.e. consumption is variable, lead times are variable, priority levels are not the same for all categories of spares, etc.
5.2 Economic Order Quantity System or EOQ System

(for higher cost, fast moving spares which follow a regular or irregular pattern of consumption, and higher cost, slow moving spares which follow a regular pattern of consumption) For spares which follow the Normal distribution of demand the basic model of stock control does not provide an acceptable mathematical model since it makes a certain number of assumptions which do not work under real-life conditions, i.e. consumption is variable, lead times are variable, priority levels are not the same for all categories of spares, etc. This has led to the development of the Economic Order Quantity System or EOQ System.
5.2.1 Description of the EOQ System

The EOQ System is based on the reordering of articles using a system of ordering calculated quantities at varying dates, the re-order dates being decided when the stock level is reduced to a particular re-order level. Each time this happens, the stock controller proceeds to reorder
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fresh stock on the assumption that normal conditions exist for replenishment of stocks and that fresh stocks will arrive before the existing stock has been consumed. He places an order for an optimum quantity 'Q'. This quantity 'Q' is normally calculated as the Economic Order Quantity (EOQ) using the Wilson formula which optimizes order quantities on the basis of certain economic considerations (see Chapter 4). The following is an illustration of the typical EOQ System process showing the variations in lead times and consumption rates as well as the Re-order level, and the Safety stock.
EOQ-SYSTEM Illustration of stock levels based on the use of the EOQ-system (calculated Economic Order Quantities at varying dates decided by the re-order level) ROP LEVEL OF STOCK ROP ROP

Re-order level Normal Safety stock Increased Safety stock

Possibility of stock-out if increased Safety Stock is not provided 'd' 'd' 'd'

TIME

Lead times or Delays

More examples of the use of the EOQ System are given in the separate document Examples of the use of the EOQ system and the P-system.
5.2.2 Application of the EOQ System

The EOQ System is generally applied to the following stock control situations, but, it must be stressed that these are not hard and fast rules : When dealing with articles which have a higher unit cost or higher costs of storing. When dealing with articles which are subject to longer lead times. When dealing with articles with special packing requirements (electrical wire, liquid adhesives, cleaning products, chemicals). Here, the calculated EOQ should be compared with the packing quantity. When the supplier offers rebates proportional to the quantities ordered. Here, in order to reduce the cost of storing Cs of a bulk order, the purchase department may arrange for supplies and payments to be staggered over a certain delivery period.

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Advantages and disadvantages of the EOQ System are: The main compromise in applying the EOQ System is the trade-off between the number of individual orders and the quantities ordered (see EOQ and the Wilson formula). The major constraint of the EOQ System is the need to regularly review the stock situation of all EOQ System articles so that the various reorder dates are not missed. The major risk of the EOQ System occurs during the lead time between the beginning of the order cycle and the arrival of the ordered items. Variations in consumption levels and lead times are normally absorbed by the Safety Stock. If the article is an essential item and consumption and delays are variable, it is necessary to increase the Safety Stock (see chapter 6) The EOQ System is not very sensitive to changes in consumption/demand, so, in the case of any reduction in consumption, stock levels can build up to unacceptable levels if the reorder quantity and re-order level are not corrected.

The EOQ System of stock control is applicable to the following classification of articles :
fast moving articles where consumption is regular or irregular, unit costs or annual consumption values are sufficiently high to justify individual orders, and costs of ownership (storing costs) are high; slow moving articles where consumption is regular, unit costs are high, and costs of ownership (storing costs) are high;

In order to create a EOQ System of stock control the following steps will be necessary for each article:
Estimate the costs Co and Cs for the article using average order costs and average stock values. Once Co and Cs have been calculated or estimated, determine the Economic Order Quantity (EOQ) for each article using the standard Wilson formula. Using this as a base figure calculate the number of annual orders on the basis of average consumption values in units. (If Co and Cs cannot be calculated or estimated, it is necessary to first estimate the number of orders, then calculate the EOQ based on annual consumption in units). Decide if the spare is "essential" or "non-essential". Decide on the Service Level (see section 6.1) and the Safety Factor (see section 6.3) Calculate or estimate the average lead time and note whether it is "constant" or whether it "varies" Calculate the Safety stock requirements and the Re-order level (see section 6.4) Incorporate these parameters for each article into the stock control programme.

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5.3

Fixed Review Period System or P-System

(for lower cost, fast or slow moving spares which follow a regular or an irregular pattern of consumption) In many cases of lower cost or lower consumption value items where the costs of storing (costs of ownership) are not high, instead of using the EOQ System (which requires greater levels of monitoring), it is often more economical and more convenient to fix the review period between the placement of orders and to vary the quantities ordered. This has given rise to the Fixed Period System or P-System of re-ordering.
5.3.1 Description of the Fixed Review Period System or P-System

In the Fixed Review Period System or P-System the review period between successive orders is fixed while the quantity to be ordered is varied. The quantity ordered is normally equal to the difference between a calculated or a pre-determined "Re-stocking level" for the stock and the prevailing stock level at the time of the review. In the P-System, consumption rates can change during the lead time once an order has been placed, but remedial action can only be taken at the time of the following review, and the remedial effect of any action will depend on the duration of that particular lead time. Therefore, a higher average stock level is necessary to prevent stock-outs. There are no Reorder levels with the P-System. The two major quantities which need to be determined in a P-System are : the desired order cycle or the Fixed Review Periods, the Restocking level.

In practice, the Fixed Review Periods are determined by the manner in which the Purchasing department is organized and by supplier constraints. Reviews can take place once a month, once every two months, etc. The Restocking levels in the P-System are initially set individually for each article according to estimated or known consumption values and lead times. Once stock levels and consumption levels are established, the Restocking levels must be readjusted, especially if average stock levels are too high. The following diagram illustrates the ideal cycle of the P-System where consumption levels and lead times are fairly constant.

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P-SYSTEM (IDEAL SITUATION) Stock control model based on the Fixed Review Period or P-System when consumption and lead times are fairly constant Lead Times or Delays Quantity ordered = Restocking level - Prevailing stock level
Restocking Level

Quantity ordered

Quantity ordered

Quantity ordered

LEVEL OF STOCK

Average Stock level

'P'

'P'

'P'

Fixed Review Periods TIME

More examples of the P-System are included the separate document Examples of the use of the EOQ system and the P-system.
5.3.2 Application of the P-System

The P-System stock control model is meant to deal with the following stock situations : when dealing with a large variety of small items for which it is not advisable or practical to monitor individual stock levels; when dealing with suppliers who offer considerable discounts for orders which are grouped; when dealing with items having normal lead times but which have to be shipped in special packing or containers where the major criterion is the container capacity; when, for reasons best suited to his own production planning, a manufacturer or supplier requests that orders be placed at periodic intervals.

Application of the system is better understood by listing its advantages and disadvantages : The P-System allows management to review, at any one time, all the articles supplied by any particular supplier or group of suppliers, and, by this means, to group orders for these articles and to make significant savings on administrative and transport costs. Grouping of articles under the P-System also increases the value of each individual order and allows the company to bargain for better financial conditions from the suppliers. This is especially useful in the case of many standard articles such as all types of mechanical fasteners or all types of small electrical accessories, where consumption is fairly regular and costs of storing Cs are not very high.

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By carrying out a regular programme of individual supplier reviews, the Purchasing department is able to draw up a more rational programme of parts ordering, which not only evens out the department workload but also helps to even out the payment schedules to the various suppliers and lowers administrative costs. The P-System of periodic reviews also ensures that all stock levels eventually get checked, even if there have been no stock movements. (This remark concerns manual stock control methods where there is no continuous monitoring of stock levels). The major disadvantage of the P-System is the need to maintain higher average stock levels than with the EOQ System. This is because it is necessary to cover the average consumption rate during the period covered by the review period and the lead time, and, depending on the unit cost and the storage volume of the article, it can lead to higher storing costs.

The P-System of stock control is, therefore, applicable to the following classification of articles:
slow or fast moving articles where consumption is regular or irregular, unit costs are not high, and costs of storing (ownership costs) are not very high;

To put in place a P-System it is necessary to carry out the following steps :

Select a Review period based on Purchasing department or supplier constraints, or, calculate the review period 'P' on the basis of the number of orders per year. Work out the average consumption for the article. Decide if the spare is "essential" or "non-essential". Decide on the Service Level (see section 6.1) and the Safety Factor (see section 6.3) Calculate or estimate the average lead time and note whether it is "constant" or whether it "varies" Calculate the Safety stock requirements and the Restocking level (see section 6.4) Incorporate these parameters for each article into the stock control programme. Once stock levels for each article are established, regularly review the Restocking levels. Stock control model for a Poisson (random) distribution of demand

5.4

(for higher cost, slow-moving spares which follow an irregular pattern of consumption) Irregular consumption of slow moving spares often leads to overstocking or understocking problems, because, not only is the consumption of these spares low (often less than 2 per year), but it is often highly irregular, i.e. over a two-year period, consumption can be zero for 23 months then, in the 24th month, consumption may be for 2 of the same spare part. Since demand for these spares is random, it is not possible to use a mathematical model based on EOQ, or re-order levels or re-stocking levels, because none of these parameters fit the random demand distribution. For slow moving spares (annual consumption < 3 units), the only way to deal with this type of random demand is to use a formula to calculate the probability of demand, i.e.<<for any period of time starting from the last consumption date, the probability that the demand level for a spare part will be either 0, 1 or 2 units >>.
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The stock controller must use the calculated probability of demand level as a measure of risk in order to help him decide whether to ensure that a part is kept in stock. To do this the stock controller will use the only known parameters (last consumption date, average consumption and demand levels) and the Poisson formula to calculate the probability of demand level for an item in any given period. The results of these calculations should be presented in the form of a Demand Level Table or an abacus which can be used by the stock controller.
5.4.1 Explanation of the Poisson formula used

The basis of this method is the formula used to calculate the probability of an event occurring within a Poisson (random) distribution of events. For a Poisson distribution of demand, the formula to calculate the probability of a demand level 'r' is given by :
p= e m .mr r!

where : p = probability of demand level r r = demand level for an item (0, 1 or 2 units for slow moving spares) m = average consumption during any given period (1-month, 3-months, 6-months, etc) The following are two illustrations of how the formula is used.
Example 1 Mean demand = 0,25 per month (irregular) Starting from the last consumption date of the part, the probability that demand level during the following month will be zero is given by the equation

p0 =

e 0,25.(0,25)0 e 0,25 .1 0,25 = =e = 0,7788= 77,88% 0! 1

Example 2 Mean demand = 2,5 per year (irregular) Starting from the last consumption date of the part, the probability that demand level during the following 12 months will be zero is given by the equation

p0 =

e 2,5.(2,5)0 e2,5.1 2,5 = =e = 0, 0821= 8,21% 0! 1

Starting from the last consumption date of the part, the probability that demand level during the following 12 months will be one is given by the equation p1 = e 2, 5.(2,5)1 e 2,5.2,5 = = 0,00821.2,5= 0,205 = 20,5% 1! 1
Preparation of the Demand Level Table
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Since we are dealing with slow moving spares (consumption < 3 units), the basic assumption used to calculate p2 is : - if po is the probability that demand level will be 0 units during a given time period, - if p1 is the probability that demand level will be 1 unit during a given time period, and, - if p2 is the probability that demand level will be 2 units during a given time period, then, since (po + p1 + p2) must be equal to 1 (100% probability), p2 = 1 - ( po + p1 )
DEMAND DISTRIBUTION TABLE FOR IRREGULAR SLOW MOVING SPARES Note : Consumption is the calculated consumption for the period considered Demand level is the probability of requiring 0, 1 or 2 units during the same period PROBABILITY OF DEMAND LEVEL FOR THE NEXT ONE MONTH Consumption (over a 1-month period) Probability that demand level will be 0 Probability that demand level will be 1 Probability that demand level will be 2 0,04 96,08% 3,84% 0,08% 0,08 92,31% 0,12 88,69% 0,16 85,21% 13,63% 1,15% 0,2 81,87% 16,37% 1,75% 0,24 78,66% 18,88% 2,46%

7,38% 10,64% 0,30% 0,66%

PROBABILITY OF DEMAND LEVEL FOR THE NEXT 3 MONTHS Consumption (over a 3-month period) Probability that demand level will be 0 Probability that demand level will be 1 Probability that demand level will be 2 0,12 88,69% 10,64% 0,66% 0,24 78,66% 18,88% 2,46% 0,36 69,77% 25,12% 5,12% 0,48 61,88% 29,70% 0,6 54,88% 32,93% 0,72 48,68% 35,05% 16,28%

8,42% 12,19%

PROBABILITY OF DEMAND LEVEL FOR THE NEXT 6 MONTHS Consumption (over a 6-month period) Probability that demand level will be 0 Probability that demand level will be 1 Probability that demand level will be 2 0,25 77,88% 19,47% 2,65% 0,5 60,65% 30,33% 0,75 47,24% 35,43% 1 36,79% 36,79% 26,42% 1,25 28,65% 35,81% 35,54% 1,5 22,31% 33,47% 44,22%

9,02% 17,34%

PROBABILITY OF DEMAND LEVEL FOR THE NEXT 9 MONTHS Consumption (over a 9-month period) Probability that demand level will be 0 Probability that demand level will be 1 Probability that demand level will be 2 0,36 69,77% 25,12% 0,72 48,68% 35,05% 1,08 33,96% 36,68% 29,36% 1,44 23,69% 34,12% 42,19% 1,8 16,53% 29,75% 53,72% 2,16 11,53% 24,91% 63,56%

5,12% 16,28%

PROBABILITY OF DEMAND LEVEL FOR NEXT 12 MONTHS Consumption (over a 12-month period) Probability that demand level will be 0 Probability that demand level will be 1 Probability that demand level will be 2 0,5 60,65% 30,33% 1 36,79% 36,79% 1,5 22,31% 33,47% 44,22% 2 13,53% 27,07% 59,40% 2,5 8,21% 20,52% 71,27% 2,99 5,03% 15,04% 79,94%

9,02% 26,42%

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Once the above table has been drawn up, the job of the stock controller will be:
to draw up a list of the spares which correspond to the Poisson demand distribution, to list the last consumption dates for each spare, to draw up a list of estimated or known lead times for each item, to indicate which spares are considered essential and non-essential, to use the Demand Level Table in order to take re-ordering decisions.

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5.4.3

Suggested method of using the Demand Level Table

When dealing with slow moving but costly maintenance spares which have an irregular demand, the major task for the stock controller is not how to calculate the EOQ or whether to place orders 'x' times per year. Starting from the last known consumption date, he has to decide whether 0, 1 or 2 units of the spare are likely to be required during the next month, 3 months, 6 months or 12 months, and, on the basis of the existing stock level, the last consumption date, and the probabilities of the Demand Level Table, take a calculated decision either to order or to delay the order. Use of the Demand Level Table is best understood by the following examples.
Example N 1 Lead time for article = 3 months Annual consumption = 0,5 (irregular) Last consumption date = 2 days ago Article considered essential Present stock level = 0 unit

Since the lead time is 3 months and the last consumption date was 2 only 2 days previously, the stock controller has only to cover a demand level period of 3 months. The stock controller notes the following probabilities of demand level : Consumption = 0,12 over 3 months po = 88,69% p1 = 10,64% p2 = 0,66%

Here, the probability of demand level being zero (po) for the next 3-month period is 88,69% or more than 8 times p1 so there is very little likelihood of one unit of the spare being required over the next 3 months. In order to confirm his decision, the stock controller should now consider the next 12 month period. Consumption = 0,5 over 12 months po = 60,65% p1 = 30,33% p2 = 9,02%

Here, the probability po is 60,65% or only twice the value of p1 (30,33%) so there is a much stronger likelihood of 1 unit being required over the next 12 months. Decision : Keeping in mind the lead time of 3 months, the stock controller can wait for upto 6 months before re-ordering one unit.

Example N 2 Lead time for article = 1 month Annual consumption = 2,0 (irregular) Last consumption date = 2 months ago Article considered essential Present stock level = 0 unit

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Since the lead time is 1 month and the last consumption date was 2 months ago, the stock controller now needs to cover a demand level period of 3 months. The stock controller notes the following probabilities of demand level : Consumption = 0,48 over 3 months po = 61,88% p1 = 29,70% p2 = 8,42%

Here, po for the next 3-month period is 61,88% or only twice p1, so there is a fairly strong possibility of one unit of the spare being required over the next 3 months. Decision : Because of the elapsed time of 2 months since the last consumption date the stock controller should immediately place an order for one unit .
Example N 3 Lead time for article = 3 months Annual consumption = 2,95 (irregular) Last consumption date = 6 months ago Article considered essential Present stock level = 1 unit

Since the lead time is 3 months and the last consumption date was 6 months ago, the stock controller now needs to cover a demand level period of 9 months. The stock controller notes the following probabilities of demand level : Consumption = 2,16 over 9 months po = 11,53% p1 = 24,91% p2 = 63,56%

Here, the probability that demand level will be zero unit (po) over a 9-month period is very low, and the probability that demand level will be 2 units (p2) is almost 3 times (p1). Decision : Here, the long lead time of 3 months and the fact that the article is considered essential will influence the stock controller's decision. Since there is already one unit in stock, he should immediately place an order for one unit .
5.5 Stock control model for Insurance or Capital or Security spares

Within the classification of very slow moving parts there is one other important type of spare parts, that of Insurance or Capital or Security spares. These are all functional parts of a machine, their working life is usually the same as that of the machine, they possess a high degree of reliability, and, as such, the probability of their being used is usually very low. Therefore, a company which decides to purchase this type of spare may end up keeping the spare in stock for the life of the machine or equipment. The term Insurance or Capital spares is used to describe high cost, long lead time items which, other than their much higher purchase cost (tied-up capital) and extremely low consumption levels, are the same as Security spares. Maintenance departments are obliged to have them in stock because of the risks of very high downtime and production losses if these items are damaged in service and there are no replacements available. The cost of keeping an insurance

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or capital spare can be compared to an insurance premium which is paid in order to avoid a costly stock-out. Demand for Insurance or Capital spares is so low one asks the question "Should we have one in stock ?" There are no mathematical stock control models for this type of spare. Decisions for having these spares in stock are taken by comparing stock-out costs to the cost of purchasing and keeping the insurance spare in stock.
Security spares are much lower cost, long lead time items which a company is again obliged to have in stock because of the risk of high downtime and production losses if there are no replacements available. Because of their lower costs of storing (cost of ownership), these spares are maintained in stock

There is no recognized stock control model which can be used for these spares because their consumption corresponds to very slow moving parts with a highly irregular consumption. It is suggested that these spares be dealt with on an individual basis by estimating : the financial costs of keeping the item in stock, and, the risk of having to bear obsolescence costs if the item becomes obsolete (as a function of the remaining life of the machine or equipment),

and then comparing them to : the cost of an alternative solution (possibility of repairs, substitution, possibility of borrowing, etc.) the shared cost if one example of the item is kept in stock and, in case of need, can be used by several users (stock pooling), the stock-out cost calculated in terms of several parameters : - evaluation of the production loss which could be caused by the stoppage of production (this should include other potential production losses while the machine is down and the item is being ordered and supplied) - additional costs which will normally be incurred when ordering an item urgently

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5.6

Choice of stock control model

Regularity of Consumption Categories of maintenance spares Principal Form of Maintenance Suggested Stock Control Model

Classification

Fast Moving

Regular

Consumables Specific parts Standard parts

Time-based Maint

EOQ system (Higher cost spares), or, P-System (Lower cost spares) EOQ system(Higher cost spares), or P-System (Lower cost spares) EOQ System (Higher cost spares), or P-System (Lower cost spares) Poisson (Higher cost spares), or P-System (Lower cost spares) Criteria based on comparison of cost of ownership and eventual stock-out cost (see 4.5) Because of their low cost and the high stock-out cost, these spares will always be kept in stock

Irregular

Specific parts Standard parts

Cond-based Maint Corrective Maint

Slow Moving

Regular

Specific parts Standard parts

Time-based Maint

Irregular

Specific parts Standard parts

Cond-based Maint Corrective Maint

Very slow moving

Very low level of consumption and very irregular

Insurance or Capital spares (High cost)

Cond-based Maint Corrective Maint

Very low level of consumption and very irregular

Security spares (Low cost)

Cond-based Maint Corrective Maint

Note : The terms higher or lower cost refer either to the purchase cost of an item, the cost of storing, or to the monetary value of the annual consumption of the item.

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HOW TO SET REORDER LEVELS (EOQ) AND RESTOCKING LEVELS (PSYSTEM)

The determination of the quantity to order tells the stock controller how much to order and how many orders to place in one year. However, decisions regarding the stock level at which to reorder (Reorder Level) or decisions regarding the Restocking Levels are more difficult to take because the effectiveness of the stock control model is also dependent on : 6.1

the variation in the lead time, the required Service Level, the corresponding Safety Factor.
Lead Times

Lead time (also known as procurement time) is defined as the total time required to obtain a spare part. Lead time consist of administrative and supply lead times An administrative lead time is the time taken to establish and process a purchase order as well as the time taken to pay for the goods. Very often, this type of lead time is the most difficult parameter to judge and to manage. Public companies generally take much longer to process purchase orders because of the amount of bureaucracy (the number of signatures) involved. A supply lead time is defined as the time elapsed between the moment the order arrives at the supplier and the moment the item is supplied. The following points are also worth noting : For spares which are consumed regularly calculations of the administrative and supply lead time are based on previous supply records. These lead times can be modified later if technology or supply conditions change. For new spares it will be necessary to estimate administrative and supply lead times. Lead times involving offers from suppliers require a process of selection and are always longer than normal. If imports of spares are involved, especially in countries with currency restrictions, lead times can become very difficult to estimate.

The first priority is to allocate lead times and to decide if the lead time is fairly constant or whether it varies with each new delivery. Lead times should be estimated in weeks.
6.2 Service Levels

All maintenance spares do not receive the same level of priority because, in case of nonavailability, all spares do not have the same impact on production. This distinction is made in terms of the "Service Level" to be allocated for each type of spare, where Service level simply expresses, in terms of a percentage, the probability of being able to supply a spare part

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when requested. The Service Levels allocated to maintenance spares depend upon the sector of activity, the level of activity, the market situation, profit margins, etc. Service level can be expressed as << the percentage of the demand that maintenance stores can supply, i.e. the number of units supplied over a given period as a percentage of the total demand>> Service levels should be allocated keeping in mind the following points : Maintaining higher Service levels (higher levels of Safety stocks) costs money, because working capital is tied up in higher Costs of Storing Cs . A class items should be accorded higher Service levels than B or C class items. The greater the number of applications for a spare part, the greater the ripple effect of a possible stock-out, therefore, the greater the need for a higher Service level. Service level is also decided by the "essential" or "vital" nature of a spare - Spares for strategically important machines which significantly affect production when there is a stock-out should receive correspondingly higher Service levels. The "uniqueness" of the article will also affect it's Service level in the sense that if alternatives are available, there is less need for a high Service level. This is especially true for Standard parts.

Deciding the Service level for each article is also a maintenance policy decision based on a certain number of criteria. Production would like to have Service Levels of 100% for a maximum number of machines in order to minimize production line stoppages, Maintenance would like to determine Service Levels based on the risk of stoppages and the strategic importance of each machine, and company management would like to consider the effects of lost sales and lost profit margins as well as additional considerations such as safety . In order to satisfy all three, it is suggested to use the following criteria : A Risk of stopping the machine 0Will not stop the machine 1Will stop the machine for a short time 2Will stop the machine for a significant time B Strategic importance of the machine 0No effect on production 1Very little effect on production 2Halts production from the machine 3Halts production from the complete production line C Degree of competition/Risk of losing customers 1Monopolistic situation and little risk of losing customers/sales 2Low/Medium risk of losing customers/sales 3High risk of losing customers/sales D Profit margins on lost sales 1Low profit margins on lost sales
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2Medium profit margins on lost sales 3High profit margins on lost sales E Safety risk 1No real risk 2Definite possibility of a safety risk 3High safety risk The various criteria can then be weighted using the following equation 2A + 3B + 1,5C + D + 5E This normally gives values between 7,5 and 35,5 where the value 7,5 can be made to correspond to a Service Level of 50% and the value 35,5 to a maximum Service Level of 100%.
6.3 Safety Factors

To avoid a stock-out happening to an essential article, when consumption as well as lead time for the article increase, it is necessary to ensure that Reorder Levels or Restocking Levels are set sufficiently high. In the most demanding scenario for an essential article (100% Service Level), the Reorder Levels or Restocking Levels should be calculated to cover the highest consumption during the longest possible lead time. However, the probability of this particular situation arising is very low, so the stock controller will use suitable "Safety Factors" as a means of incorporating this probability factor in his calculations. What Safety Factors are to be used? For all slow moving maintenance spares which display a random pattern of demand distribution, the basic question to be answered is only whether to have none, one or two units in stock. The answers are found using the Demand Distribution Table and the calculated probabilities of demand. No Safety Factors are to be used. For fast and slow moving maintenance spares other than the above, it is enough to have the following synthesized table in place of the more complex statistical tables. Safety Factors in this table are drawn from existing statistical tables.
Service Level % Safety Factor 50 0 58 0,2 66 0,4 73 0,6 79 0,8 84 1 85 1,04 90 1,28 92 1,41 95 1,64 98 2,05

For example, if we only require a Service Level of 50% or less, the Safety Factor = 0. If we require a Service Level of 85% the Safety Factor to be used is 1,04.
6.4 Setting Reorder Levels (EOQ) or Restocking Levels (P-System)

On the basis of the information in the previous sections, the following table presents the various ways to calculate either the Reorder level for a spare managed by the EOQ System, or the Restocking Level for a spare managed by the P-System.

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Stock Control Model

Importance of spare

Lead time

Service Level

Safety Factor

Suggested Reorder Levels

EOQ System

Essential

Regular

High

>1

((Ave consumption) x (Lead time)) + (Safety Stock for consumption fluctuations) ((Ave consumption) x (Lead time + SD lead time)) + (Safety Stock for consumption fluctuations) (Ave consumption) x (Lead time) x Safety Factor ((Ave consumption) x (Lead time + SD lead time)) x Safety Factor

Irregular

High

>1

Non-essential

Regular

Low

<1

Irregular

Low

<1

Stock Control Model

Importance of spare

Lead time

Service Level

Safety Factor

Suggested Restocking Level

P - System

Essential

Regular

High

>1

((Ave consumption) x (Lead time + Review Period) x Safety factor) + (Safety Stock for consumption fluctuations) ((Ave consumption) x (Lead time + SD lead time + Review Period) x Safety Factor) + (Safety Stock for consumption fluctuations) (Ave consumption) x (Lead time + Review Period) x Safety factor (Ave consumption) x (Lead time + SD lead time + Review Period) x Safety Factor

Irregular

High

>1

Non-essential

Regular

Low

<1

Irregular

Low

<1

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