Order Placement with MINMAX Buy model:

Orient is using MINMAX model to place orders. It involves the ERP SAP automatically
evaluates the historical data to which weight has been assigned according to preceding month
production and relates it with last years same month production to evaluate minimum and
maximum value to place the order. Minimum value is used to save production which means the
optimal inventory level for smooth production while the maximum value is to save cost of the
inventory. The technique allows for keeping track of total current stock level that is the sum of
stock on hand and the stock on order for every single SKU. The Min value signifies the stock
level that triggers the reorder while the Max value signifies the new desired stock level that is
followed by the reorder; hence the reordered quantity is represented by the difference between
the Max and the Min stock level values. The moment when the inventory reaches the minimum
point, the system generates a purchase order.

To avoid any crude form of fixed Economic Order Quantity, the management distributes the
forecasted demand for each SKU into quartiles through a N+3 rule. The N+3 rule is a
technique where N represents the present month and 3 represents the next three months. The
purpose of using N+3 rule is to counter the variations in demand that are assumed to be constant
for Fixed Order Quantity model. It results in similar Min and Max values at all times and
constant reordering taking place for every SKU. To avoid any stock outs, the company maintains
a Safety stock (buffer stock) that is additional quantity of items to mitigate the risk. Due to
uncertain variations in supply and demand, adequate level of safety stock for each SKU is
essential for the smooth running of the business operations.

Since, Orient is not following a pull manufacturing system which involves orders being placed
with the suppliers only when required, MINMAX model is a workable methodology for its pre-
determined forecasted scheduling for placing orders with suppliers. In case of LED, the company
maintains a total of 60 SKUs. The estimated demand of LED sales is 190,000 in 2016 that is
divided into four quartiles with a maximum point of 47,500 and minimum point (reorder point)
of 10,000. However, the management maintains a safety stock of 12,000 units to avoid stock-
outs.