Inventory policy
An inventory policy is a standard set of rules/boundaries and guidelines that provide the framework for an organisation to make better informed and timely decisions on which stock to purchase or manufacture, how much stock to purchase or manufacture and where to store and distribute to customers.
In the absence of any product knowledge or planning parameters such as leadtime, safety stocks, etc a stock policy must be applied and monitored regularly against future demand. By measuring the variability between forecast demand and historical sales data by month, businesses will then be able to implement the right planning parameter settings and improve their level investment in stock. Several stocking policies can be implemented to improve stock management performance, these being: Reorder point; Min/Max; lot for lot; days of supply and item location. The following components are essential for an effective inventory policy:
- The level of inventory at stocking points or locations
- Number of warehouses or nodes
- Number of stocking points or nodes
- Order qty and order frequency
- Replenishment qty and replenishment frequency
Which inventory method is best for my business?
Reorder Point - Fixed Replenishment point or fixed replenishment quantity is used when the stock falls below a certain point which then triggers an order release.
Min / Max is used when stock falls to or below the minimum stock levels which triggers a replenishment or reorder qty equal to the maximum level. Carton rounding can apply with the reorder qty to make the warehouse operation more efficient with handling.
Lot for Lot or demand flow generates a new replenishment order for the same qty at the time the previous order arrives to your facility or operation.
Days of Supply (Historical demand based) is similar to the min / max above, however this method relies on average daily sales using historical demand to calculate an order qty for a number of days supply.
Days of Supply (Forecast demand based) is similar to min / max above, however this method relies on average daily sales using forecast demand to calculate an order qty for a number of days supply.
Item location which is based on the multi echelon optimisation approach that incorporates greater emphasis on all elements of the entire end to end supply chain where there is variability in demand, projections or service.
Types of stock
The Physical stock an organisation may store as an asset is in the following forms:
- Maintenance, repair and operating (MRO)
Stock reduction
Organisations must strive towards reducing stock levels on a regular basis and can adopt a number of strategies to achieve this objective, a few of which are listed below: (Refer our detailed list of stock reduction strategies):
Direct deliveries of purchase products in raw material or assembly form can be delivered to a manufacturing line or processing point and avoid double handling through a warehouse process.
Just in time production by only making what is required resulting in lower WIP inventory.
Direct Deliveries of finished goods by shipping direct from your source of supply and avoiding your logistics network, if possible.
Why the need for stock?
There are a number of core reasons why companies need to keep a level of stock across their operations, however, the challenge is to really understand the total cost of your supply chain and the impact stock can have to a range of functions and facilities within your business.
Depending upon the nature of your business or the strategy your organisation is adopting to meet the needs of the market, understanding the total supply chain cost will enable you to make better decisions on expanding your organisation or scaling down the number of sites or warehouses and still achieve the right customer service level at the right cost for your business. Following are some reasons for keeping stock:
- Economies of scale for purchasing and manufacturing
- Variation in consumer demand
- Economic conditions, strikes etc
Select a Supply Chain and Logistics Assessment that identifies real improvement.
We offer a range of assessments that are tailored to specific functions within your oganisation that require review. Depending on the scope of works or the scale of your organisation, our assessments are typically completed within 2 weeks of commencement for single site entities. Reference sites available on request.
