8th July, 2016
For companies that carry inventory (manufacturers, distributors, retailers and service providers) and want to better manage their inventory availability while reducing ordering and carrying costs, these strategies will be perfect for you.
Last month we discussed the importance of maintaining accurate records. This time we focus on proactive planning to avoid shortages and overstock situations.
Replenishment describes the process of bringing inventory into the warehouse to replace inventory which is used or sold.
The most efficient replenishment will plan for the new supply to arrive just before it is needed, or just before the supply runs out (just in time). Reorder point (ROP), another methodology, does that based on average or assumed usage and typical lead time, but there are other approaches.
Businesses can use an approach called Material Requirements Planning (MRP) that calculates how much of each material and component items is needed, and when, to be able to complete the master production schedule.
Distributors can use a similar technique called Distribution Requirement Planning (DRP). Both techniques are based on a forecast of demand (sales), and work backward in time through the distribution network (DRP) or bill of materials (MRP) to line up replenishment orders (quantities and start dates/due dates) to minimize inventory while preventing shortages.
Both approaches rely on accurate data (inventory record accuracy included) and good forecasts.
There are other approaches that some companies find more beneficial for their particular markets, but the point is that while inventory is costly, shortages can be devastating to the business. Simple management approaches like reorder point may not deliver the combination of low inventory and high availability that you need. Inventory management, planning, and optimisation systems offer a wide range of tools that allow you to be proactive in managing inventory in the plant, the warehouse and throughout the supply chain.
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No replenishment planning approach is perfect—because we cannot know the future (demand) exactly, and because demand will vary from day-to-day and week-to-week.
In order to protect the availability from these variations, companies carry a little extra inventory, called safety stock. More safety stock will reduce the risk of a “stock-out”, of course, but more safety stock also adds to your inventory investment.
The same holds true for other safety measures like shrinkage factor, yield allowance, padded lead times (telling the supplier to deliver before you expect to need the items just in case they deliver late)—they all add inventory.