Challenge To Transform From ordering System To Be Reorder Point (ROP) System

Challenge To Transform From Ordering System To Be Reorder Point (ROP) System

Logistics+, Vol. VIII Issue No. 46
By: Tenaka Budiman, Executive Board of ALI

On this occasion, I would like to share my experience pertaining to the implementation of replenishment system, which are now mostly replacing fixed order system. For this new system to work, its application must include the cooperation of at least three parties, manufacturers, distributors and third party logistics (3PL), depending on the management decision. Here is how it works. The distributor always sends orders directly to the manufacturer, then the manufacturer must fill the order and send them to designated points of sales (POS) of the distributor. The distributor may have 100 POS around Indonesia, so the manufacturer must be able to deliver directly to every distributor's warehouse. In this case, there are no hub and spokes system between the two parties.

If the distributor orders more than the sales department has the ability to sell, called an over prediction, then there will be too much stock in the warehouse of distributors. As a result, too many shipments from a manufacturer's warehouse will result in queue of goods which must be unloaded day by day in the warehouse of distributors, as only their warehouse will likely be able to accommodate 3-4 days of sales stock. In addition, if an over prediction of sales like this occurs, shipments coming from the manufacturer may be greater than the sales department's capabilities form that distributors. This will adversely affect the transportation costs for the manufacturer.

Besides that, many manufacturer face the dilemma of where to put prepared, finished goods as orders pile up waiting to be sent because other warehouse's manufacturer are also dumping their overstock into their warehouse at the same time. The main priority here would be to send out any and every order, which has already been submitted and cannot be canceled, as quickly as possible. The opposite scenario would be a situation where orders from distributors are lower than sales capability, known as under prediction. The result could be a loss of sales opportunities, so scrambling to place emergency orders to manufacturer may then become necessary. As long as the manufacturer can handle emergency orders efficiently by having enough buffer stock, of course it is not going to be much of a problem, the problem id if the emergency order is greater than the estimation in the manufacturer's supply plan, the production division and the manufacturer must push the procurement and purchasing division to pressure suppliers to deliver raw materials and packaging materials earlier than schedule. Of course, the lead time from every supplier is not going to be the same because the destinations could be local or overseas.

It could be a messy problem if emergency orders are necessary during a marketing promotion campaign due to a weak supply and demand plan. Surprisingly, this does often occur due the faulty supply and demand planning resulting from miscommunications within the supply chain. Even though intense collaborative planning may have taken place, problems may still arise as competitors activities are usually hard to predict and sales department figures are almost never completely on the mark.

Overstock and out of the stock situations can be minimized by using a better ordering system. Because of a general lack of forecasting ability among distributors, a system that relief not on open orders, but on a replenishment system, like the ROP system, could be the solution.

Distribution centers and 3PL can be use the ROP system to better their forecasting abilities. The process of transforming a system from ordering to replenishment is not as simple as one would imagine. Based on its concept, it looks simple, but many aspects must be considered very comprehensively, so distributors and warehouses must be up to the task.

These are many aspects of the supply chain which should be reviewed before implementing the system. This is commonly referred to as the SMART (Specific, Measurable. Achievable, Realistic, Time bound) approach:
1.    Project organization and project charter: First, appoint a project leader and choose the team's members. Next, give the project a title, an objective, a timeline, a budget, the determine the expected outcome and scope of the project.
2.    Coverage area and SKU: The warehouse of each distributor must know where SKU will be implemented. An agreement should be made by both sides: the manufacturer and distributor, along with any 3PL.
3.    Supply and demand planning: obtain forecasts from distributors through collaborative meetings and accurate supply and demand planning. Determine which forecasts numbers are likely to be the most and least accurate set tolerance limits for the supply planning division so it can prepare its materials in anticipation if a possible demand increase. It should be noted that manufacturer and distributors, together with 3PL, not only lead the ROP system, but also must command the ordering system.
4.    Process: the supply planning division's plan must include products fulfillment parameters to adhere to the ROP process. If your distribution centers are run by the 3PL, have them carefully analyze the inventory data from its source. Inventory data should be used to determine how to deal with fixed orders and outstanding orders.
5.    Order submission timeline and administration process: in the warehouse, the processing of the orders must be prompt and efficient in the ROP system. There should be agreements between the distribution centers, manufacturers and 3PL as to how to deal with emergency situations if they arise. There may be problems, for example, if your distribution center, which is managed by 3PL and operates 24 hours, 6 days per weeks, but the administration at the logistics manufacturer only operates 5 day a week. This is why new agreement need to be sought as processes, work allotments and hours may have to change, for various parties.
6.    Data information: highly accurate data collection is essential to make the ROP system work successfully. There needs to be highly visibility of inventory levels and a maximum limit must be determined so that 3PL is able to make accurate ROP plans and prepare products which need to be delivered.
7.    Execution: it should be determined based on the readiness of each process and the quality of the information systems being used. Running simulations can be helpful in determining if anything needs improvement or readjustment. To ensure proper project implementation, take pictures of inventory positions from every SKU included in the project and of course, carefully check that transportation is always functioning and ready. For example, trucks should always be ready and have the capacity to carry whatever deliveries need to be moved. If there is problem, it should be determined if the deliveries can be sent the next day or even earlier, if possible. Besides that, the time it takes for shipments to arrive at the warehouse of distributors also needs to be carefully estimated to ensure that goods arrived at their destination on time in order so they can be used by the sales division. Furthermore, goods receivers also need reviewing to avoid bottlenecks in the unloading queue.
8.    Measure performance: Closely measure performance as mistakes can be easily missed, so constantly assess all activities to ensure that all processes are working as planned and review outcomes. Share this information with distributors, manufacturer and 3PL. The PICA method (Problem Identification and Corrective Action) can be used in every review

The ROP System is generic application which can lead to successful fulfillment and replenishment. It can be help keep inventory levels in line with sales needs, especially with a distribution center system focused on the proper management of warehouse and transportation and the delivery of products from various manufacturers. Making deliveries without using fully loaded trucks is not good economic value. For many manufacturers, inventory problems are hard to solve if ROP is applied without combining the deliveries based on sales principle, the ROP system will not work. The ROP system does not only give benefits to distributors, but also manufacturers as they can analyze materials based on replenishment, limiting the chances of over or under prediction. Only through firm cooperation between distribution centers, manufacturers and sales departments can the implementation of an efficient ROP system be certain. Moreover, one must always remember that content review, problem identification and corrective action must all become routine actions. The main lesson system is cooperation between supply chain members is the only way to realize consistent achievements.