INVENTORY MANAGEMENT POLICES
Inventory management is the integrated process that operationalizes the firms and the value chain’s inventory policy. The reactive or pull inventory approach uses customer demand to pull product through the distribution channel. An alternative philosophy is a planning approach that proactively schedules product movement and allocation through the channel according to forecasted demand and product availability. A third, or hybrid, logic uses a combination of the first two approaches resulting in an inventory management philosophy that responds to product and market environments. Each approach is reviewed, and application guidelines are presented.
Inventory control:
Inventory control is a mechanical procedures for implementing an inventory policy. In order to implement the desired inventory management policies, control procedures must be devised. These define how often inventory levels are reviewed and compared against the inventory parameters defining when to order and how much to order. The following discussion reviews these control alternatives and outlines the implications for each. Inventory control procedures can be characterized as either perpetual or periodic.
Perpetual Review
A perpetual inventory control process reviews inventory status daily to determine replenishment needs. To utilize this type of control system, accurate accountability is necessary for all stockkeeping units. Computer assistance is needed to implement the perpetual concept effectively.
A perpetual review process is implemented through a recorder point and order quantity. As discussed earlier,
ROP = D x T + SS
Where ROP = record point in units
D = average daily demand in units
T = safety or buffer stock in units
The order quantity is determined using EOQ, EOQ, extensions, or another approach as discussed earlier.
For purpose of illustration, let us assume that there is no uncertainty, so no safety stock is necessary.
ROP = D x T + SS
20 Units/day x 10 days + 0 = 200 units
The perpetual review compares the sum of on-hand and on-order inventory to the item’ reorder point. On-hand inventory represents the quantity that physically resides in the particular distribution facility. On-order inventory represents quantities that have been ordered from suppliers. If the on-order quantity is less than the established reorder point, the inventory control process will initiate another replenishment order. Mathematically, this can be stated as
If I + Q ≤ ROP the order Q
Where I = inventory on hand
Q = inventory on order from suppliers
ROP = order quantity units
The reorder formulation is derived from two assumption: purchase orders for the item under control will be placed when the reorder points is reached, and the method of control provides a continuous monitoring of inventory status. If these two assumptions are not satisfied, the control parameters (ROP and Q) determining the perpetual review must be refined.
Periodic Review
Periodic inventory control reviews the inventory status of an item at regular time intervals such as weekly or monthly. For periodic review, the basic reorder point must be adjusted to consider the extended intervals between reviews.
The formula for calculating the periodic review reorder point is
ROP = D(T + P/2) + SS
Where ROP = reorder point
D = average daily demand
T = average performance-cycle length
P = review period in days
SS = safety stock
Since inventory status counts are completed only at a specific time, any item could fall below the desired reorder point prior to the review period. Therefore the assumption is made that the inventory will fall below ideal reorder status prior to the periodic count approximately one-half of the review times.
ROP = D (T + P/2) + SS
= 20(10 + 7/2) + 0 = 20(10 + 3.5) = 270 Units
The average inventory formulation for periodic review is
Ī = Q/2 + (P x D)/2 + SS
Where Ī = average inventory in units
Q = order quantity units
P = review period in days
D = average daily demand
SS = safety stock
Because of the time intervals introduced by periodic review, periodic control systems generally require larger average inventories than perpetual systems.
Inventory management is the integrated process that operationalizes the firms and the value chain’s inventory policy. The reactive or pull inventory approach uses customer demand to pull product through the distribution channel. An alternative philosophy is a planning approach that proactively schedules product movement and allocation through the channel according to forecasted demand and product availability. A third, or hybrid, logic uses a combination of the first two approaches resulting in an inventory management philosophy that responds to product and market environments. Each approach is reviewed, and application guidelines are presented.
Inventory control:
Inventory control is a mechanical procedures for implementing an inventory policy. In order to implement the desired inventory management policies, control procedures must be devised. These define how often inventory levels are reviewed and compared against the inventory parameters defining when to order and how much to order. The following discussion reviews these control alternatives and outlines the implications for each. Inventory control procedures can be characterized as either perpetual or periodic.
Perpetual Review
A perpetual inventory control process reviews inventory status daily to determine replenishment needs. To utilize this type of control system, accurate accountability is necessary for all stockkeeping units. Computer assistance is needed to implement the perpetual concept effectively.
A perpetual review process is implemented through a recorder point and order quantity. As discussed earlier,
ROP = D x T + SS
Where ROP = record point in units
D = average daily demand in units
T = safety or buffer stock in units
The order quantity is determined using EOQ, EOQ, extensions, or another approach as discussed earlier.
For purpose of illustration, let us assume that there is no uncertainty, so no safety stock is necessary.
ROP = D x T + SS
20 Units/day x 10 days + 0 = 200 units
The perpetual review compares the sum of on-hand and on-order inventory to the item’ reorder point. On-hand inventory represents the quantity that physically resides in the particular distribution facility. On-order inventory represents quantities that have been ordered from suppliers. If the on-order quantity is less than the established reorder point, the inventory control process will initiate another replenishment order. Mathematically, this can be stated as
If I + Q ≤ ROP the order Q
Where I = inventory on hand
Q = inventory on order from suppliers
ROP = order quantity units
The reorder formulation is derived from two assumption: purchase orders for the item under control will be placed when the reorder points is reached, and the method of control provides a continuous monitoring of inventory status. If these two assumptions are not satisfied, the control parameters (ROP and Q) determining the perpetual review must be refined.
Periodic Review
Periodic inventory control reviews the inventory status of an item at regular time intervals such as weekly or monthly. For periodic review, the basic reorder point must be adjusted to consider the extended intervals between reviews.
The formula for calculating the periodic review reorder point is
ROP = D(T + P/2) + SS
Where ROP = reorder point
D = average daily demand
T = average performance-cycle length
P = review period in days
SS = safety stock
Since inventory status counts are completed only at a specific time, any item could fall below the desired reorder point prior to the review period. Therefore the assumption is made that the inventory will fall below ideal reorder status prior to the periodic count approximately one-half of the review times.
ROP = D (T + P/2) + SS
= 20(10 + 7/2) + 0 = 20(10 + 3.5) = 270 Units
The average inventory formulation for periodic review is
Ī = Q/2 + (P x D)/2 + SS
Where Ī = average inventory in units
Q = order quantity units
P = review period in days
D = average daily demand
SS = safety stock
Because of the time intervals introduced by periodic review, periodic control systems generally require larger average inventories than perpetual systems.