Module: Base stock and max base stock

Executive summary

Base stock, also called baseline, serves as a base level for ordering goods. If the stock on hand reaches this level, it is necessary to order the goods.

To know how much goods we should order, we need max base stock (maximum stock): we order the difference between the current stock on hand and max base stock.

In reality, we wait till the stock on hand reaches the level of base stock (or it is below that level) and then we order supplies to the max base stock.

Both these stock levels appear in the same module: they are calculated using the same algorithm, but they use different inputs. The base stock is computed for a period of lead time, while the max base stock is computed for the lead time + ordering periods.

Base and max base stock is computed in two different ways, depending on regularity of sales, as discussed in the module Categorization based on regularity of sales:

For non-sporadic, regularly sold items, we use the value of safety stock (which also provides us with SLI). To the value, we add an average forecast for the period of lead time for base stock and for the level of lead time + period for the max base stock. On average, this arrangement ensures that if you ordered exactly at the level of the base stock, the goods will arrive after the lead time, when the stock has reached the safety stock level, thus just in time.

For sporadic, rather irregularly sold items, we use randomness algorithm which simulates randomness of sales. The exact description can be found in the functional description.

The base stock and max base stock do not respect either promotion sales or promotional sales forecast. Therefore, for items under a promotion (regardless regularity of sales), the method for sporadic items is used automatically, and for ordering, the base stock is used just as an additional criterion.

Functional description

Both the base stock and max base stock – contrary to safety stock – are set for months. The whole month always has the same base stock and the base stock cannot be changed for a day.

Here, we describe computations for base stock. For max base stock, the procedure is identical, but instead of lead time, we us lead time + period.

Computation (of base stock and max base stock) for non-sporadic products

For non-sporadic products, we use recomputation based directly on the computation of safety stock. To the safety stock component, we add average sales (moving average from the surrounding three months) for the period of lead time.

This ensures that safety stock is always lower than base stock (leaving aside exceptions during promotions) and between the ordering time and delivery time, the difference between the base and safety stock is sold, so at the time of delivery, the stock on hand should be precisely at the level of safety stock.

For the items at the central warehouse, the safety stock must be increased of the forecast of the central warehouse and all the branches.

For the items that serve as raw materials, the computation takes into consideration sale of the raw materials and sales of products from the raw materials, according to the BOM.

Computation (of base stock and max base stock) for sporadic products

For sporadic products, we use a customized Smart’s probabilistic method.

As input, the daily sales for the last year are used (the period can be changed in settings).

From this data series, we choose X random days. X is equal to days of the product’s lead time. The sum of sales during these days is labelled as Y. This figure says essentially “it is possible that during the X days of the lead time, Y pieces of the product are sold”.

This process is repeated 100,000 times and individual results Y are stored as we go along.

From the results, we create a histogram of frequencies of totals of Y and given the service level Z (e.g. 99.5%), we select the quantity for which it is true that this (or smaller) quantity of products were sold at Z% of cases.

For sporadic products – as for non-sporadic – sales from branches are loaded for the central warehouse and sales of products are loaded for raw materials.

Displaying base stock

The base stock can be viewed at several locations in STOCK:

• In the report Product overview, there is a table listing stocks in the aggregate product, warehouse, month, base stock.
• In the tab Detail of the module Detail, the base stock (for the given month) is shown in monthly sales chart.
• In the tab Explaining orders of the module Detail: there you find detailed overview of safety stock day by day for the entire period for which orders are made. The base stock is the same figure for each day of the month.