The most common reason for production halts is not machine failure, but the lack of materials. Moreover, a large portion of these stoppages are predictable.
The problem usually lies in communication. The production plan operates in one place, purchasing in another, and the two only talk when the material runs out.
In this article, we explained how to derive material requirements from the production plan, the order trigger, lead time calculation, and critical level setup.
Table of Contents
The cost of disconnection
The cost of a stoppage caused by material shortage is not limited to lost production hours alone.
Urgent orders are placed and bought more expensively than usual. Additional shipping fees are paid for fast delivery.
The production plan changes and other jobs are postponed. This produces a chain reaction of delays.
When customer deliveries are delayed, a loss of reputation occurs, and this cost is never calculated.
This entire chain stems from a predictable need; visibility alone prevents most of it.
Requirement calculation
Requirement calculation is derived from combining the production plan with the bill of materials and is based on a simple multiplication.
The planned finished product quantity is multiplied by the unit consumption in the bill of materials. The result is the total quantity of that material needed.
If the same material is used in multiple finished products, all requirements must be summed up. Looking at them separately is misleading.
Scrap allowance must also be factored in; otherwise, the requirement will constantly come up short.
We covered the bill of materials structure in the bill of materials article.
Comparison with current stock
The calculated requirement is not the order quantity on its own. Current stock and pending orders must be deducted.
Current stock is the total of the main warehouse and the workshop warehouse. Looking at only one of them will generate an incorrect order.
Orders already in transit must also be taken into account. Otherwise, the same material will be ordered twice.
If there are quantities reserved for other productions, these must also be deducted.
The deficit remaining as a result of this calculation gives the actual order requirement.
Lead time calculation
When to place an order is just as critical as how much to order. This is determined by the lead time.
Lead time is the period from placing the order until the material is ready for use.
This period also includes transportation, customs, and acceptance inspection. Relying solely on the supplier's quoted time is misleading.
Lead times vary by material and supplier, and must be derived from actual data.
Tracking actual lead times also feeds into supplier evaluation.
Critical level configuration
Not every production plan is known in advance. Therefore, critical level alerts complement the plan-based calculation.
The critical level is the sum of the quantity to be consumed during the lead time and the safety stock.
Safety stock is kept to absorb consumption fluctuations and supply delays.
Safety stock should be kept high for critical and scarce materials, while a low level is sufficient for easily accessible ones.
We explained the level determination method in the critical stock level article.
Purchase trigger
After the need is identified, the purchasing process must begin. This transition can be automated.
Purchase requests can be automatically generated for materials that fall below the critical level.
However, the conversion of the request into an order should require approval. Fully automated ordering creates the risk of uncontrolled purchasing.
The previous purchase price and supplier information should be visible on the request; this shortens the decision time.
We discussed the approval workflow in the purchasing approval workflow article.
Order quantity decision
The order quantity is not determined solely by the missing amount. Other factors also come into play.
The supplier's minimum order quantity sets the lower limit. Orders cannot be placed below this.
Quantity discounts can make buying more economical. However, this ties up capital and requires warehouse space.
For materials with a shelf life, over-purchasing increases the risk of waste and eliminates savings.
These balances must be evaluated on a material-by-material basis; a single rule is not suitable for all items.
Tracking pending orders
Placing an order does not mean the material will arrive. Open orders need to be monitored.
For orders with approaching delivery dates, confirmation should be obtained from the supplier. A delay learned on the last day halts production.
Partial deliveries must also be tracked; the deficient quantity directly affects planning.
Recording delays enables the measurement of supplier performance.
We discussed open order tracking in the open order tracking article.
Weekly planning routine
Material planning works much more reliably when tied to a regular routine.
In the weekly meeting, the production plan for the upcoming period is reviewed and material requirements are extracted.
Then, materials below the critical level are checked and requests are generated.
The status of pending orders is also confirmed in this meeting.
Having production and purchasing managers at the same table is the most effective step to eliminate misalignment.
Points to consider
The reliability of the account depends on the accuracy of inventory data. Incorrect inventory generates incorrect orders.
Outdated BOMs (Bills of Materials) yield the same result; an obsolete BOM calculates wrong requirements.
Keeping lead times overly optimistic is the most common planning mistake.
Keeping safety stock high for all materials ties up unnecessary capital.
Operations run in the purchasing module and work together with the production plan.
Frequently asked questions
Can the requirement calculation be done automatically?
If BOM and plan data are available, the calculation can be generated; the order decision remains subject to approval.
How does it work in multi-level BOMs?
The calculation proceeds step by step; first, the intermediate product requirement is calculated, followed by its raw material requirement.
How is safety stock determined?
It is derived from consumption fluctuation and delivery delay history; it should vary on a material basis.
Does it work with the existing ERP system?
Yes, it does; we covered the synchronization setup in the ERP synchronization article.
The link between production and purchasing is a simple setup that eliminates a large portion of material-related stoppages.
Include current inventory and incoming orders in the requirement calculation; incomplete calculation generates duplicate orders.
Derive lead times from actual data. Optimistic lead times are where planning fails most frequently.
Differentiate safety stock on a material basis as well; assigning the same share to every item ties up unnecessary capital.
Establish a weekly planning meeting as well; bringing production and purchasing to the same table is the most effective step.
By consulting with the EQLEM team you can build your material planning structure.