What is ORQ?
The Optimal Replenishment Quantity (ORQ) is the order size that minimizes your total annual replenishment costs while meeting service level requirements. Unlike simple Economic Order Quantity (EOQ) calculations, GAINS ORQ considers four key cost components to find the true optimal order size for each item at each location.
How ORQ is Calculated
GAINS analyzes multiple order quantities to find the one with the lowest total annual cost, considering:
- Procurement Cost - Material cost including quantity discounts and price breaks
- Receiving Cost - Fixed costs of placing and receiving orders (or setup costs for manufacturing)
- Cycle Stock Carrying Cost - Cost of carrying average inventory (ORQ ÷ 2)
- Service Stock Carrying Cost - Cost of carrying safety stock (which decreases as ORQ increases)
The system tests order quantities from 1-day supply up to 1-year supply to find the optimal balance point.
Common ORQ Issues
1. ORQ Values Are Too Large
Symptoms:
- ORQ represents many months of supply
- High inventory investment with slow turnover
- ORQ values that don't align with business practices
Possible Causes:
- High receiving/setup costs - Fixed costs per order drive larger batch sizes
- Low carrying cost rates - Underestimated cost of holding inventory
- Quantity discounts or price breaks - Significant cost reductions for larger quantities
- Low annual demand - Small usage volumes result in proportionally large order quantities
- Incorrect cost parameters - Wrong setup costs, carrying rates, or unit costs
Troubleshooting Steps:
- Review receiving cost and carrying cost rate settings
- Check for quantity discounts that might be driving large orders
- Verify annual demand forecast accuracy
- Consider applying maximum ORQ constraints if business requires smaller lots
- Review actual procurement and carrying costs with finance team
2. ORQ Values Are Too Small
Symptoms:
- ORQ represents only days of supply
- Frequent small orders increasing administrative burden
- Higher total costs due to frequent ordering
Possible Causes:
- High carrying cost rates - Overestimated cost of holding inventory
- Low receiving/setup costs - Underestimated fixed costs per order
- High annual demand with low unit costs - Fast-moving, inexpensive items
- Missing quantity constraints - No minimum order quantities applied
- Incorrect demand forecasts - Understated annual usage
Troubleshooting Steps:
- Verify carrying cost rates are realistic (typically 20-30% annually)
- Review receiving cost parameters - include all order-related costs
- Check forecast accuracy and annual demand projections
- Apply minimum ORQ constraints if suppliers have minimums
- Consider incremental ORQ settings for package/pallet quantities
3. ORQ Values Change Dramatically
Symptoms:
- ORQ fluctuates significantly between planning cycles
- Inconsistent order quantities for similar items
- ORQ changes don't reflect business reality
Possible Causes:
- Volatile demand forecasts - Changing forecasts drive different ORQ calculations
- Cost parameter changes - Updates to carrying costs, setup costs, or unit costs
- Service Stock interactions - Changes in Service Stock affect ORQ optimization
- Price break thresholds - ORQ crossing quantity discount breakpoints
- Lead time changes - Affecting Service Stock and total cost calculations
Troubleshooting Steps:
- Review forecast stability and accuracy over time
- Check for recent changes in cost parameters
- Examine Service Stock trends and their impact on total costs
- Review price break structures and thresholds
- Consider ORQ constraints to limit volatility
4. ORQ Doesn't Meet Business Constraints
Symptoms:
- ORQ values don't align with supplier minimums
- Order quantities don't match package sizes or pallet quantities
- ORQ conflicts with cash flow or storage limitations
Possible Causes:
- Missing constraints - No minimum, maximum, or incremental ORQ settings
- Outdated constraint parameters - Old minimums or package sizes
- Conflicting business rules - ORQ optimization vs. operational constraints
- Cash flow limitations - Financial constraints not reflected in carrying costs
Troubleshooting Steps:
- Apply appropriate minimum ORQ constraints for supplier requirements
- Set incremental ORQ for package/pallet multiples
- Use maximum ORQ constraints for cash flow or storage limits
- Review and update constraint parameters regularly
- Balance optimization with practical business needs
Key Factors That Affect ORQ
Annual Demand
- Higher demand generally increases ORQ
- Forecast accuracy is critical for proper ORQ calculation
- Consider seasonality and trending in demand patterns
Cost Parameters
- Receiving Cost: Higher setup costs increase ORQ
- Carrying Cost Rate: Higher carrying costs decrease ORQ
- Unit Cost: Affects carrying cost calculations
- Price Breaks: Can create step changes in optimal ORQ
Service Requirements
- Service Stock levels interact with ORQ optimization
- Higher service levels may affect optimal order quantities
- Lead time impacts both Service Stock and ORQ decisions
Business Constraints
- Supplier minimum order quantities
- Package sizes and shipping constraints
- Storage capacity and handling limitations
- Cash flow and working capital considerations
When to Take Action
Immediate Review Required:
- ORQ values that seem unreasonable for the business
- ORQ causing cash flow or operational problems
- Significant changes in ORQ without corresponding business changes
Regular Monitoring:
- ORQ as weeks of supply across different item categories
- Total inventory investment driven by ORQ decisions
- Actual ordering patterns vs. GAINS ORQ recommendations
Periodic Updates:
- Cost parameters (receiving costs, carrying rates, unit costs)
- Business constraints (minimums, maximums, increments)
- Supplier terms and quantity discount structures
Best Practices
- Accurate Cost Data - Work with finance to ensure realistic cost parameters
- Regular Parameter Review - Update costs and constraints at least annually
- Constraint Management - Apply appropriate minimums, maximums, and increments
- Exception Monitoring - Review items where ORQ seems inappropriate
- Business Alignment - Balance optimization with practical operational needs
- Forecast Accuracy - Maintain good demand forecasts as they drive ORQ calculations
ORQ Constraints and Overrides
Minimum ORQ
- Use for supplier minimum order requirements
- Set based on package sizes or handling minimums
- Prevents ORQ from going below practical limits
Maximum ORQ
- Apply for cash flow or storage constraints
- Use when optimization suggests impractically large orders
- Consider seasonal or trend factors
Incremental ORQ
- Set for package, pallet, or container multiples
- Ensures orders align with physical handling requirements
- Rounds ORQ to practical order increments
ORQ Override
- Completely replaces calculated ORQ
- Use sparingly and document reasons
- Review overrides regularly for continued relevance
Related GAINS Concepts
- Service Stock - Interacts with ORQ in total cost optimization
- PIPE - Uses ORQ to determine excess inventory thresholds
- Action Codes - ORQ determines balanced inventory levels
- Forecast Accuracy - Annual demand drives ORQ calculations
- ABC Analysis - Different cost parameters may apply by item class
For detailed ORQ calculation methodology and cost factor analysis, refer to Chapter 8 "Optimizing Service Levels" in the GAINS Reference Manual.