Replenishment Policies and Inventory Planning

Inventory Planning

The two processes of replenishment and inventory are closely related. The inventory planning process establishes the optimal inventory levels that must be maintained to meet expected service levels for demand fulfillment. What does that exactly mean? To understand we need to explore the replenishment (or re-ordering) process. In doing so, we will also establish the decision parameters an inventory planning process provides for the replenishment to work at its most optimal levels.

Replenishment or Reordering

Reordering or replenishment process needs to define review period for reordering, and an ordering quantity. Then it needs the inventory parameters to determine whether an order for replenishment should be placed at the time of review or not. Based on how the review period and order quantities are defined, there are a few options to drive the reordering.

These terms refer to the frequency of review to determine when orders must be placed for replenishment.

In the continuous review process, the inventory levels are continuously reviewed, and as soon as the stocks fall below a pre-determined level (usually called, reorder point, or reorder level), replenishment order is placed. As more and more companies start using sophisticated IT systems to track their inventories in real-time, the continuous review method becomes a viable and optimal way to plan for replenishment.

Under periodic review, the inventory levels are reviewed at a set frequency. At the time of review, if the stock levels are below the pre-determined level, then an order for replenishment is placed, otherwise it is ignored till the next cycle. This method provides a viable process alternative to the continuous review by segmenting the merchandise into review buckets. This makes it easier to manage when the process is manual, or the number of items involved is extremely large, or when constraints on ordering-day exist.

Order Quantity and Order up-to Level

These terms refer to the process that is used to determine how much is ordered when a replenishment order is placed.

In the first process, the “order quantity” is fixed. If the review determines that an order should be placed, then the order for a pre-defined quantity for that item-location combination is placed for replenishment. The order quantity for all replenishment orders is fixed in this method, though order day may vary or may be fixed depending on the review method.

The second process defines a pre-determined “order up-to level” instead. The actual order quantity is determined as the difference between the on-hand stock on the review day, and the pre-determined “order up-to level”. The order quantity in this process will differ from one order to another depending on the on-hand quantity on the day of the review.

Between these two sets of parameters, four basic reordering process options become available.

Options for Re-ordering Process

Based on the above two parameters, the reordering process can be deployed in the four basic ways. The diagrams below depict these variations of the process.

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