The Smart Forecaster

 Pursuing best practices in demand planning,

forecasting and inventory optimization

MAX-MIN OR ROP – ROQ

by Philip Slater

This guest blog is authored by Philip Slater, Founder of SparePartsKNowHow.com the leading educational resource for spare parts management. Mr. Slater is a global leader and consultant in materials management and specifically, engineering spare parts inventory management and optimization. In 2012 Philip was honored with a national Leadership in Logistics Education Award. To view the original blog post, click here.

There are essentially two ways that companies express their inventory control settings: either as MAX- MIN (sometimes MIN-MAX) or ROP-ROQ.

Some people will say that it doesn’t really matter which you use, just as long as you understand the definitions and the pros and cons. However, in my experience it does matter and this is one aspect of spare parts inventory management that you really do need to get right.

Let’s Start With the Definitions for MIN, MAX, ROP & ROQ

 

MIN = short for minimum

There is, confusingly, two schools of thought about what is meant by the MIN. Most typically this is the point at which the need to order more stock is triggered. Sometimes, however, the MIN is seen as the minimum quantity that can be safely held to cover expected needs. In this case the need to order more stock is set so that the reorder point is one less than the MIN value. That is. MIN -1.

The key to managing when using a MIN setting is to understand the configuration of the computer system you use, as different definitions will change the resulting holding level, the re-order point, and perhaps even the actual safety or buffer stock.

MAX = short for maximum

This value is most typically the targeted maximum holdings of the item. Usually, in a MAX- MIN system, where the MIN is the reorder point, the quantity reordered after reaching the MIN is the quantity required to get back to the MAX. For example, if the MAX- MIN is 5-2, when the quantity in the storeroom reaches 2, procurement would need to order 3 to get back to the MAX.

ROP = Reorder Point

As the name suggests, quite simply, this is the stock level at which the need to reorder is triggered. This is calculated by determining the safety stock level and the stock required to service needs during the reorder lead time.

ROQ = Reorder Quantity

Again, as the name suggest, this is the quantity to be reordered when the ROP is reached. This is not the EOQ but rather the quantity that both makes economic sense and is commercially available.

MAX-MIN OR ROP – ROQThe Differences are Meaningful and Important

It is essential that every inventory manager understands that the MAX- MIN and ROP-ROQ approaches are not simply interchangeable.

For example, in general terms:

MIN can be equated with the ROP, except if you have a system set up for reordering at a point of MIN-1. In that case, there is no equivalence.

For slow moving items the MAX can in some circumstances be equal to the ROP + ROQ. This is because for slow moving items it is possible that there will be no additional demand before the newly ordered item(s) arrive in stock.

However, with all other items the MAX is UNLIKELY to be equal to the ROP + ROQ as items may be issued between the time of reaching the MIN and the newly ordered items arriving. In fact, there is a logic that says that the MAX would never actually be achieved.

Do these differences matter? I think that they do.

For example, what if you change IT systems? If you move from one type of MAX-MIN system to another but they define the MIN differently then you cannot just migrate your data. This may not seem obvious if everyone is using the language of MAX-MIN but is classic trap where words are used in different ways.

Similarly, if you are benchmarking your holding levels with another company or site then you need to be aware of the different definitions and the outcomes that each approach would achieve. Otherwise you are comparing ‘apples with pears’.

Or what about what happens when a new team members arrives at your company and their previous company used the terms MAX-MIN but with different parameters or meaning to that your company uses. There will likely be an assumption that the terms are used in the same way and this could lead to stock shortages or overstocks, depending on the differences in the definitions.

To add further confusion, some software systems use the term ‘Safety Stock’ to represent the MIN holding level, despite this not being the universal definition of safety stock. This different nomenclature leads some people to assume that holding less than the so-called ‘safety stock’ according to your IT system is ‘unsafe’ or risky, when in fact it may not be at all. They may even be holding an excessive level of stock because they don’t properly apply the term ‘safety stock’. Calling it safety stock does not make it so.

Pros and Cons

MAX-MIN

Pros:

• Conceptually simple to understand.

Cons:

• Terms can be misleading in terms of safety stock and actual maximums.

• Terms are used in different ways and so caution required to ensure a common understanding.

• Values often set using ‘experience’ or intuition.

• Often leads to overstocking while reporting misleading overstock data

ROP-ROQ

Pros:

• Meaning of each term is clear and consistent.

• Values set using auditable logic.

• Safety stock values clearly established.

• Holdings more likely to reflect the actual needs and commercial constraints.

Cons:

• Requires more work to determine the appropriate values.

You Need to Get This Right

The differences between MAX-MIN and ROP-ROQ are not trivial and the terms certainly are not interchangeable. In my experience, the ROP-ROQ approach produces greater transparency and is easier to manage because there is no confusion about the meaning of the terms. This approach also produces a more appropriate and auditable level of inventory.

This suggests that if spare parts inventory management is important to you then you really do need to get this right.

 

Leave a Comment

Related Posts

Confused about AI and Machine Learning?

Confused about AI and Machine Learning?

Are you confused about what is AI and what is machine learning? Are you unsure why knowing more will help you with your job in inventory planning? Don’t despair. You’ll be ok, and we’ll show you how some of whatever-it-is can be useful.

Centering Act: Spare Parts Timing, Pricing, and Reliability

Centering Act: Spare Parts Timing, Pricing, and Reliability

In this article, we’ll walk you through the process of crafting a spare parts inventory plan that prioritizes availability metrics such as service levels and fill rates while ensuring cost efficiency. We’ll focus on an approach to inventory planning called Service Level-Driven Inventory Optimization. Next, we’ll discuss how to determine what parts you should include in your inventory and those that might not be necessary. Lastly, we’ll explore ways to enhance your service-level-driven inventory plan consistently.

Recent Posts

  • What is Inventory Control Planning Management Optimization DictionaryWhat is Inventory Planning? A Brief Dictionary of Inventory-Related Terms
    People involved in the supply chain are likely to have questions about various inventory terms and methods used in their jobs. This note may help by explaining these terms and showing how they relate. […]
  • artificial intelligence ai and machine learning inventory managementConfused about AI and Machine Learning?
    Are you confused about what is AI and what is machine learning? Are you unsure why knowing more will help you with your job in inventory planning? Don’t despair. You’ll be ok, and we’ll show you how some of whatever-it-is can be useful. […]
  • Centering Act Spare Parts Timing Pricing and ReliabilityCentering Act: Spare Parts Timing, Pricing, and Reliability
    In this article, we'll walk you through the process of crafting a spare parts inventory plan that prioritizes availability metrics such as service levels and fill rates while ensuring cost efficiency. We'll focus on an approach to inventory planning called Service Level-Driven Inventory Optimization. Next, we'll discuss how to determine what parts you should include in your inventory and those that might not be necessary. Lastly, we'll explore ways to enhance your service-level-driven inventory plan consistently. […]
  • Balance,Concept,With,Chrome,Balls,inventory optimization softwareHow to Forecast Inventory Requirements
    Forecasting inventory requirements is a specialized variant of forecasting that focuses on the high end of the range of possible future demand. Traditional methods often rely on bell-shaped demand curves, but this isn't always accurate. In this article, we delve into the complexities of this practice, especially when dealing with intermittent demand. […]
  • Demand Planning twin brothers holding forecasting toolsSix Demand Planning Best Practices You Should Think Twice About
    Every field, including forecasting, accumulates folk wisdom that eventually starts masquerading as “best practices.” These best practices are often wise, at least in part, but they often lack context and may not be appropriate for certain customers, industries, or business situations. There is often a catch, a “Yes, but”. This note is about six usually true forecasting precepts that nevertheless do have their caveats. […]

    Inventory Optimization for Manufacturers, Distributors, and MRO

    • Centering Act Spare Parts Timing Pricing and ReliabilityCentering Act: Spare Parts Timing, Pricing, and Reliability
      In this article, we'll walk you through the process of crafting a spare parts inventory plan that prioritizes availability metrics such as service levels and fill rates while ensuring cost efficiency. We'll focus on an approach to inventory planning called Service Level-Driven Inventory Optimization. Next, we'll discuss how to determine what parts you should include in your inventory and those that might not be necessary. Lastly, we'll explore ways to enhance your service-level-driven inventory plan consistently. […]
    • 5 Steps to Improve the Financial Impact of Spare Parts Planning5 Steps to Improve the Financial Impact of Spare Parts Planning
      In today’s competitive business landscape, companies are constantly seeking ways to improve their operational efficiency and drive increased revenue. Optimizing service parts management is an often-overlooked aspect that can have a significant financial impact. Companies can improve overall efficiency and generate significant financial returns by effectively managing spare parts inventory. This article will explore the economic implications of optimized service parts management and how investing in Inventory Optimization and Demand Planning Software can provide a competitive advantage. […]
    • Bottom Line strategies for Spare Parts Planning SoftwareBottom Line Strategies for Spare Parts Planning
      Managing spare parts presents numerous challenges, such as unexpected breakdowns, changing schedules, and inconsistent demand patterns. Traditional forecasting methods and manual approaches are ineffective in dealing with these complexities. To overcome these challenges, this blog outlines key strategies that prioritize service levels, utilize probabilistic methods to calculate reorder points, regularly adjust stocking policies, and implement a dedicated planning process to avoid excessive inventory. Explore these strategies to optimize spare parts inventory and improve operational efficiency. […]
    • professional technician engineer planning spare parts in industrial manufacturing factory,Prepare your spare parts planning for unexpected shocks
      In today's unpredictable business climate, we do have to worry about supply chain disruptions, long lead times, rising interest rates, and volatile demand. With all these challenges, it's never been more vital for organizations to accurately forecast parts usage, stocking levels, and to optimize replenishment policies such as reorder points, safety stocks, and order quantities. In this blog, we'll explore how companies can leverage innovative solutions like inventory optimization and parts forecasting software that utilize machine learning algorithms, probabilistic forecasting, and analytics to stay ahead of the curve and protect their supply chains from unexpected shocks. […]