In this second article of this series titled, “Four Strategies for Inventory Control” we will discuss the second key strategy for inventory control – Proactive Planning.
Restocking is a process through which stock is refreshed in the warehouse as it is being used. The most effective restocking process are those where new stock is brought into the warehouse just as the old inventory is used, or in other words just in time. The order point is a stock replenishment methodology which is based on average consumption of stock. There are also several other methodologies for stock replenishment.
Material Requirements Planning (MRP) is a technique used to calculate how much each material is needed and when it is required to complete the master production schedule. It is also possible for distributors to use a similar technique called Distribution Requirement Planning (DRP) to plan the availability of their product. These techniques work on forecasting the demand for products in the future. They then work backward in time to calculate stock required at different periods of time. For example, manufacturing companies will use the Bill of Material (BOM) to calculate inventory requirements at different periods of time. A pre-requisite for these techniques is to have accurate data available.
There are several other inventory management techniques as well. The key point for all these systems is to ensure that inventory is available when you need it. If these forecasting systems fail, and the company does not have stock when they need it, it can be costly to the business in lost sales, etc. Inventory management or ERP systems offer a wide variety of tools to proactively manage the stock position throughout the entire supply chain process.
It is impossible to predict future demand because demand varies from week to week or even day to day basis, therefore no replenishment approach is considered perfect. One technique largely used by companies is Safety Stock, meaning carrying little extra stock. While carrying safety stock it reduces stock out risks but increases your inventory investment. Shrinking factor, yield allowance, padded lead times are other safety measures and the same hold true for them also. They all add to inventory.