Reordering Policies in Business Central

Planning in Business Central #2

In this post, I will discuss the reordering policies available in Business Central. I will cover the following topics:

When using the planning module, it is important to categorise items. Depending on the categorisation, then different reordering policies are used, and different planning parameters are used. I’ll cover planning parameters in the next post in this series and I’ll talk more about categorisation towards the end of this post.

The reordering policies can be found on the Planning fast tab of an item card, or a SKU card.

Reordering Policies

There are 4 reordering policies you can choose from. For an item to be considered for planning, it must have a reordering policy assigned to it.

Business Central’s reordering policies fall in three broad categories:

  • Policy where the reorder point is monitored
  • Policy where the safety stock is monitored
  • Policy where there is no monitoring of inventory levels, only demand is monitored

PolicyNotes
Fixed Reorder Qty. This policy monitors the reorder point and safety stock
Maximum Qty.This policy monitors the reorder point and safety stock
OrderThis policy doesn’t monitor inventory levels. Instead each demand event is managed individually regardless of inventory levels
Lot-for-LotThis policy monitors the safety stock

The Reorder Point

The reorder point is the inventory level of an item, which when reached, should trigger a new supply order. The reorder point is generally calculated as the “demand for the item during its lead time”. In other words, it’s the quantity of inventory that you need to cover the demand up to the time when the supply reaches you.

So if the demand for an item is 25 units per week and it takes a week to receive a new supply, then the reorder point is 25. If it takes two weeks to receive a new supply, then the reorder point is 50 units. This way, you always have enough inventory to fulfil demand until the next delivery.

To monitor the reorder point, Business Central calculates the projected inventory of the item. When calculating the projected inventory, the starting inventory level will be the inventory (i.e. what’s in stock), plus any un-posted supplies with a date in the past, and minus any un-posted demands with a date in the past. It follows that on the starting date of the planning exercise, projected inventory doesn’t include any demand on the starting date. It includes demand up to the previous day.

Then future demand and supply events respectively increase and decrease the projected inventory against a timeline. If the projected inventory reaches the reorder point, then a supply order will be suggested the following day.

For example:

  • An item has a starting inventory of 100
  • The reorder point is 25
  • The reorder quantity is 100
  • The lead time is 7 days, including weekends

Below, we can see the inventory (orange) decreasing as demand (negative blue) is plotted over time. When the projected inventory reaches the reorder point of 25, a supply order for 100 is placed the next day.

Inventory then reaches 0 on the day before the supply order is due to arrive, and it is then replenished to 100 the following day (positive blue).

Let’s visualise the data in Business Central. Here are the lead time, reorder point and reorder quantity settings.

The demand is created by future sales shipments:

If we get Business Central to suggest when and how much to order using the planning worksheet (which I’ll cover in another post), we get this:

If we have a look at the availability of the item by event, we can see the same result as on the graph. Inventory becomes 0 the day before the supply replenishes inventory to 100.

The Safety Stock

The point of the safety stock is to be there to fulfil any unexpected demand. The best way to think of the safety stock is that it is the new “zero”. In other words, if the safety stock is set at 25 units, then 25 means 0. This way, there are always 25 units in stock, just in case.

To monitor the safety stock, Business Central calculates the projected available inventory over time. The difference here is the word ‘available’. What this means is that Business Central calculates the portion of projected inventory that is available to fulfil demand.

When calculating the projected available inventory, the starting inventory level will be the inventory (i.e. what’s in stock, but only if you choose to include it), plus any un-posted supplies with a date in the past, minus any un-posted demands with a date in the past, minus any future demand reserved against current inventory.

Often the projected inventory and the projected available inventory will be the same. But if you use reservations, then the projected available inventory could be lower than the projected inventory. For example, if current inventory is reserved against future orders, then the projected available inventory today will be considering the future demand, and therefore will be less than what I have in stock today.

In addition, and very importantly, the biggest difference with the reorder point policies is that Business Central will proactively suggest supplies that try to ensure that inventory is never below safety stock. So supply orders will be suggested so that they arrive just in time and in the quantity necessary to ensure safety stock is not breached.

If we take the same example as before, with no reservations, we can see that on 13/02, the projected available inventory will be 0, because demand for 25 units will decrease inventory to 0. This is 25 units below safety stock, so Business Central suggests a supply order for 25 units on 06/02, which according the lead time, will ensure a delivery on 13/02. The safety stock level is not breached.

Let’s take a look at the item setup in Business Central.

The result in the planning worksheet is as per the graph.

Now let’s look at the effect of reservations. I have reserved quantities against current inventory for two additional future orders on 06/03 and 13/03.

This means that the projected available inventory today is now 50, even though I have 100 units in stock.

So inventory will breach safety stock on 30/01 and 06/02 and 13/02. To avoid this, Business Central will suggest supply orders for the quantity needed, and on the date needed, to ensure the safety stock remains at 25.

The result in the planning worksheet is as per the graph.

It is therefore important to note that if reservations are in use for an item, then a reorder point monitoring policy should not be used for that item. Instead, the safety stock monitoring policy should be used.

The ‘Order’ Reordering Policy

The Order reordering policy doesn’t monitor inventory levels at all. Instead, it reacts to demand events, and suggests supply orders to meet each demand event independently.

Another important point is that the demand and the supply become bound to each other by a reservation.

In terms of setup, there is only the Reordering Policy field to consider. All the setup fields that we looked at up to now are greyed out because they are not considered at all when that policy is used.

If we look at the same example as before, I have removed the reservations on the lines of the sales order. So we have 6 demand points.

Therefore we can expect Business Central to suggest 6 supply orders, to meet the demand on the shipment dates. Running the planning worksheet does return the expected results:

You’ll notice that there is an attention warning on the first line. I’ll cover the warnings in a future post about the planning worksheet.

If we take a look at the sales order lines again, we can see that the lines are all reserved:

The reservations are initially reserved from the planning worksheet lines, but these will be become reservations from purchase order lines once I create the supply orders.

Which Reordering Policy?

Now that we have covered the three broad types of reordering policies, it becomes easier to understand when to use which policy.

Microsoft have a good graph on the Business Central website, which shows an ABC item classification:

With the reorder point monitoring policies, we can see that Business Central reacts when it reaches the reorder point, and suggests to place a supply order the next day. In addition, the minimum amount of stock ordered is independent of demand. It’s purely based on the setup of the item. Therefore this policy could be suggesting supply orders that lead to carrying excess stock (although only up to the allowed overflow). So this policy is suitable for items for which you don’t mind carrying excess stock: these are generally low value, non perishable, and with a fast turnover. On the graph, these are C items. It is worth nothing that with these policies, the safety stock will also be monitored. If a safety stock breach is detected, then a backwards supply order will be suggested to stop the breach. However, if you setup the item with a reorder point which is above demand during lead time, safety stock is unlikely to be breached.

With the safety stock monitoring policy, we can see that Business Central reacts proactively to try and stop breaching safety stock. So the supply orders are suggested to be placed before that point is reached, not after, so that the supply orders attempt to stop breaching safety stock. In addition, the supply quantity suggested is just enough to cover demand and to keep stock level at safety stock. This policy is therefore a just-in-time policy, aiming to minimise stock holding to just what’s necessary. So this policy is suitable for item which carry relatively high costs, have a relatively fast turnover, and for which you would prefer not to carry excess stock. On the graph, these are B items.

Finally, with the Order reordering policy, Business Central suggests independent supply orders, to be delivered in time for each demand point, matching exactly each demand point quantity. If there is no demand, no supply order will be suggested. Therefore this policy is suitable for item for which you do not want to carry any stock. These are typically items with low turnover and high cost, for which you place a supply order only when you have demand for it. On the graph, these are A items.

Before you make a decision on which policy to use, I recommend that you understand the various planning parameters that are available to use. I’ll cover this in my next post. They are especially useful for the Lot-for-Lot policy.

But we can already broadly define when to use a policy, based on what we have covered so far:

PolicyPolicy TypeWhen to Use
Blankn/aUse to plan manually
Fixed Reorder Qty.Reorder point monitoringHigh stock turnover
Low cost
No reservations
Excess inventory OK
C items
Maximum Qty.Reorder point monitoringStorage limitations or relatively high cost
High stock turnover
No reservations
Excess inventory not acceptable beyond a maximum
C items
Lot-for-LotSafety stock monitoringFairly high cost
Fairly high stock turnover
No excess inventory preferable
Good if you use reservations
B items
OrderOrder-to-order binding
No monitoring of inventory
High cost
Low stock turnover
Excess inventory not acceptable
A items

If you’re not sure whether to use a reorder point or safety stock monitoring policy, it is recommend that you use the Lot-for-Lot policy. This can generally be used for the majority of items which are not A items.

Previous: Planning in Business Central #1. Learn about the global setup with or without locations.

Next: Planning in Business Central #3. Learn about the planning parameters.

Leave a Reply