What is an Inventory Policy?

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 an inventory 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 inventory.

Several stocking policies can be implemented to improve inventory management performance, these being: Reorder point; Min/Max; lot for lot; days of supply and item location. Each of these inventory policies is reliant on most if not all of the following components for an effective inventory policy:

  • ABC Classification
  • Safety stock levels
  • 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
  • Lead time from suppliers
  • Stock obsolescence
  • Slow moving stock
  • Inventory Procedures

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.

Developing the right inventory strategy and implementing effective inventory management processes are critical in driving the highest service levels to your customers.

For more information, visit http://www.turnkeysolutions.net.au/inventory-policy.html


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