Page 152 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 7: Inventory Management

2. Inventory policy consists of guidelines concerning what to purchase or manufacture, Notes
when to take action, and in what quantity. It also includes decisions regarding inventory
positioning and placement at plants and distribution centres.

Example: Some firms may decide to postpone inventory positioning by maintaining
stock at the plant.
3. The second inventory policy element concerns inventory management strategy.
4. The service level is a target specified by management. It defines the performance objectives
that the inventory function must be capable of achieving.
5. The service level can be defined in terms of an order cycle time, case fill rate, line fill rate,
order fill rate, or any combination of the above.
6. The performance cycle is the elapsed time between the release of a purchase order by a
customer and the receipt of the corresponding shipment.
7. Average inventories include cycle, safety stock, and transit inventory components.

8. Cycle Inventory Cycle inventory, or base stock, is the portion of average inventory that
results from the replenishment process. At the beginning of a performance cycle, stock is
at a maximum level. Daily customer demands “draw off” inventory until the stock level
reaches zero.
9. A replenishment order is initiated so that stock will arrive before a stock out occurs. The
replenishment order must be initiated when the available inventory is greater than or
equal to the customer demand during the performance-cycle time. The amount ordered
for replenishment is called the order quantity.
10. The average inventory held as a result of the order process is referred to as base stock.
11. Another commonly used term to identify this aspect of inventory is lot size stock.
12. Transit Inventory represents stock that is either moving or awaiting movement in
transportation vehicles. This portion of total inventory is referred to as transit or pipeline
inventory.
13. From a logistics management perspective, transit inventory introduces two sources of
complexity into the supply chain. First, transit inventory represents real assets and must
be paid for, even though it is not accessible or usable. Second, there has typically been a
high degree of uncertainty associated with transit inventory because shippers were unable
to determine where a transport vehicle was located or when it was likely to arrive.

14. The second part of average inventory is the stock held to protect against the impact of
uncertainty on each facility. This portion of inventory is called safety stock. Safety stock
inventory is used only at the end of replenishment cycles when uncertainty has caused
higher than expected demand or longer than expected performance-cycle times.



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Contd...

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