Inventory policy essentials for the right order policy

Inventory policy essentials for the right order 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.

Inventory policies: "5 types"

Several stocking policies can be implemented to improve stock management performance, these being:

  1. 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
  2. Min/Max: 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.
  3. Lot for lot: demand flow generates a new replenishment order for the same qty at the time the previous order arrives to your facility or operation.
  4. Days of supply: 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.Forecast demand data can also be used.
  5. Item location: 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.

Effective inventory policy: "Essential components"

The following components are essential for an effective inventory policy:

  1. ABC Classification
  2. Safety stock levels
  3. Correct inventory level at stocking points
  4. Number of warehouses or stocking points
  5. Order qty and order frequency
  6. Replenishment qty and frequency
  7. Lead time from suppliers
  8. Stock obsolescence
  9. Slow moving stock
  10. Policies, procedures and documentation

Inventory: "4 types of stock"

The Physical stock an organisation may store as an asset is in the following forms:

  1. Raw Materials or components that are used within an essembly process
  2. Work in process, that part of inventory which is being concerted to a final state either as a component or finished good
  3. Finished goods, these can be imported, assembled or manufactured to a final state.
  4. Maintenance, MRO spare parts that are used to support final state equipment

Inventory reduction: "Our effective strategies"

Organisations must strive towards reducing stock to desired levels and can achieve this by following a logical process. As number of strategies can be adopted and implemented effectively, we have selected a few below and also provide a detailed listing under "Inventory Reduction strategies". In summary, these are:

  1. 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.
  2. Just in time production by only making what is required resulting in lower WIP inventory.
  3. Direct Deliveries of finished goods by shipping direct from your source of supply and avoiding your logistics network, if possible.