This article is part of the
Inventory Policy series, split from the original
Inventory Policy article.
Purpose of Inventory Policy
Inventory policy is about setting safety stock and
replenishment levels based on the organization's risk tolerance for stocking
out. The system uses the lead time and demand variance to calculate optimal
levels of stock.
Desired service level and stocking policy is set based on an
items segmentation classification. For example, items with low variability
should be made to stock and have a 95% service level.
The grid has a lot of useful quantitative information, like
the expected demand during the lead time, the recommended reorder frequency in
this case four days and the output from the inventory optimization, safety
stock and reorder quantity.
The official safety stock becomes a minimum target, and the
maximum target is calculated from the sum of the safety stock plus the reorder
quantity. Users can override the calculated safety stock and reorder quantities
to publish an official minimum and maximum target.
These official targets are then used in inventory analysis
and SOP.
Arkieva Inventory Policy provides a recommendation for safety stock and reorder points based on the risk tolerance of the organization. Arkieva calculates the safety stock based on the lead time variance and the estimated demand variance from the forecast.
In a retail type of situation where replenish cycles are fixed (example daily, weekly, etc.) Arkieva provides a method based on Economic Order Quantity (EOQ) principles. This method calculates the replenishment quantity and re-order frequency based on demand.
Use Inventory Policy to
- Calculate Safety Stock and Reorder Quantities for items
- Override recommended Safety Stock and Reorder for items
- Define fulfillment percentages for Make to Order (MTO) items
- Define fulfillment percentages for Make to Stock (MTS) items
Understanding the Sawtooth Chart for Inventory Replenishment
Adjusting Policy and Fulfillment Settings
Make changes to the default engine settings used to calculate safety stock and re-order quantities by selecting “Settings” in the toolbar.
Here you can adjust the fulfillment percentages and production policy for items.
Consider using the Make to Stock (MTS) policy when the item is in high demand and is very popular. An item like this should already be made and available in a warehouse to meet customer demand.
Consider using the Make to Order (MTO) policy when the customer count is low, or the demand is very sporadic. The production of an item would be held off until a customer order has been made.
Inventory Policy series