SYSTEM OF STOCK REPLENISHMENT
1. Reorder point strategy
select a stock level that signals when it’s time to reorder inventory.
2. Periodic strategy
inventory is replenished at specific intervals
3. Top-off strategy
Also known as lean time replenishment, takes advantage of times when
picking operations are slow to bring stock to acceptable levels in forward pick
locations.
4. Demand strategy
Restocking or reordering is limited only to what’s needed to fill orders
Types of Inventory Costs
[Link] Costs
Ordering costs include payroll taxes, benefits and the wages of the
procurement department, labor costs etc. These costs are typically included in
an overhead cost pool and allocated to the number of units produced in each
period.
• Transportation costs
• Cost of finding suppliers and expediting orders
• Receiving costs
• Clerical costs of preparing purchase orders
• Cost of electronic data interchange
Clerical costs of preparing purchase orders — there are many kinds of
clerical costs, such as invoice processing, accounting, and communication
costs
Cost of finding suppliers and expediting orders — costs spent on these will
likely be inconsistent, but they are important expenses for the business.
Transportation costs — the costs of moving the goods to the warehouse or
store. These costs are highly variable across different industries and items
Receiving costs — these include costs of unloading goods at the warehouse
and inspecting them to make sure they are the correct items and free of
defects
Cost of electronic data interchange (EDI) — These are systems used by
large businesses and especially retailers, which allow ordering process costs to
be significantly reduced.
[Link] Holding Costs
This is simply the amount of rent a business pays for the storage area where
they hold the inventory. This can be either the direct rent the company pays
for all the warehouses put together or a percentage of the total rent of the
office area utilized for storing inventory.
1. Inventory services costs
2. Inventory risk costs
3. Opportunity cost - money invested in inventory
4. Storage space costs
5. Inventory financing costs
Inventory financing costs — this includes everything related to the
investment made in inventory, including costs like interest on working capital.
Opportunity cost of the money invested in inventory — this is found by
factoring in the lost alternatives of tying money up in inventory, such as
investing in term deposits or mutual funds
Storage space costs — these are costs related to the place where the inventory
is stored and will vary by location. There will be the cost of the storage facility
itself, or lease payments if it is not owned. Then there are facility maintenance
costs like lighting, heating, and ventilation. Depreciation and property taxes
are also included in this
Inventory services costs — this includes the cost of the physical handling of
the goods, as well as insurance, security, and IT hardware, and applications if
these are used. Expenses related to inventory control and cycle counting are
further examples
Inventory risk costs — a major cost is shrinkage, which is the loss of
products between purchasing from the supplier and final sale due to any
number of reasons: theft, vendor fraud, shipping errors, damage in transit or
storage. The other main example is dead stock
[Link] Costs
Shortage costs, also known as stock-out costs, occurs when businesses
become out of stock for various reasons. Some of the reasons might be as
below :
• Emergency shipments costs
• Disrupted production costs
• Customer loyalty and reputation
Disrupted production — when the business involves producing goods as
well as selling them, a shortage will mean the business will have to pay for
things like idle workers and factory overhead, even when nothing is being
produced
Emergency shipments — for retailers, stock-outs could mean paying extra to
get a shipment on time, or changing suppliers
Customer loyalty and reputation — aside from the loss of business from
customers who go elsewhere to make purchases, the company takes a hit to
customer loyalty and reputation when their customers are unhappy
Safety Stock
Safety stock is an extra quantity of a product which is stored in the warehouse
to prevent an out-of-stock situation. It serves as insurance against fluctuations
in demand. Also known as ‘buffer stock’
[Link] against demand spikes:Safety stock protects you against the
sudden demand surges and inaccurate market forecasts that can happen during
a busy or festive season. It serves as a cushion when the products you’ve
ordered take longer to reach your warehouse than you expected.
[Link] stock for longer lead times: Unexpected delays in production or
transportation, such as a bottleneck at your supplier’s end or a weather-related
shipping delay, can cause your products to reach you later than expected.
During these situations, safety stock acts as your defense against a possible
stockout scenario
[Link] against price fluctuations:Unpredicted market fluctuations can
cause the cost of your goods to increase suddenly. This can be due to a sudden
scarcity of raw materials, an increase in price of raw materials, unexpected
demand surges in the market, new competitors, or new government policies. If
you’ve got enough safety stock during these unpredictable situations, it can
help you avoid the costs of buying stock at higher prices without sacrificing
sales.
Service Level
The cycle service level (or just service level) is the expected probability of not
hitting a stock-out during the replenishment cycle, and thus, it is also the
probability of not losing sales.
The cycle duration is implicitly the lead time.
Service level is the probability that the amount of inventory on hand during
the lead time is sufficient to meet expected demand – that is, the probability
that a stock out will not occur.
