Inventory Policy

Inventory Policy

David Mbaya

Jomo Kenyatta University of Agriculture and Technology

28th June 2013

Introduction

An inventory policy can be described as the customary set of guidelines and rules that an organization follows in order to make timely and informed decisions on the stock to manufacture or purchase in terms of quantity and quality and on where to store the goods and distribute them to customers (Muller, 2011). Absence of planning and such kinds of product knowledge coupled with other parameters like safety, stocks and lead time call for a stock policy that must be monitored and applied regularly against the projected future demand (Nahmias, 2011). The best method of implementing applicable planning parameters settings and elevated position in the stock market is done by evaluating the variability between monthly historical sales and the forecasted demand. It is in this order that several stocking policies may be applied to improve the stock management performance. These are; min/max, reorder point, lot for lot, item location and days of supply (Muller, 2011). For an inventory policy to be effective, it has to have the following parts,

• ABC Classification
• Safety stock levels
• The level of inventory at stocking points or locations
• Number of warehouses or nodes
• Number of stocking points or nodes
• Order quantity and order frequency
• Replenishment quantity and replenishment frequency
• Lead time from suppliers
• Stock obsolescence
• Slow moving stock
• Inventory Procedures

Among the major challenges facing most organisations are those of managing their inventory effectively in an attempt to minimize the inventory investment at the same time using the available resources more efficiently with an inventory or planning management function. It is therefore recommended that there be uttermost understanding of the inventory profile of the company in question with detailed information of what it offers to the clients, recent levels of inventory, frequency of movement and the rate of sales of products at all the levels of SKUs (Muller, 2011).

A Typical Inventory Policy for a Clinic

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Figure 1: An inventory policy for a clinic

     As depicted in Figure1 an ideal inventory policy must conform to the characteristics regardless of the company or organisation in question (Saxena, 2009). In this particular inventory policy, the clinic does the monitoring of the entire inventory then goes ahead to order. The essence of this mode of approach is to make sure that only necessary things are procured. The wholesaler on the other hand goes through the order and processes it by stock checking, packaging and finally delivering to the client; the clinic. The chain ends after the client receives their order but may keep on recurring.

     This article aims at discussing push and pulls methods as suitable methods of inventory policy. This word originated from supply chain management and logistics but may also be applied in marketing. A large number of companies use the push-pull method of inventory among them Kenya’s Nakumatt, General Motors East Africa and Bidco Oil Refineries among others.  In a nutshell, push-pull strategy involves an exchange of information or a product between two parties. In the market, the consumer is keen on ‘pulling’ the information or the goods they require. On the other hand, a company is keen to ‘push’ its products to the market to the targeted consumer (Saxena, 2009).

Push System

The push structure of inventory regulation involves forecasting inventory prerequisites to achieve customer demand (Muller, 2011). Companies must forecast and envisage which products customers will buy along with determining the quantity of goods to be purchased. The company then produces enough products to satiate the forecasted demand then goes ahead to push, these goods to the customer. Drawbacks of this inventory control method are that predictions are every so often erroneous since sales can be erratic and differ from year to year (Muller, 2011). The other problem with this inventory control structure is that a lot of product stays in the inventory thus increasing the company's expenses for storing the goods. On the other hand, merit to the system is that the enterprise is fairly guaranteed to have sufficient product on hand to satisfy customer orders, averting the inability to satisfy customer demand for the manufactured goods. A good example of the push system is the “Materials Requirements Planning” or MRP (Muller, 2011). This method puts together calculations for operations, logistics and financial planning. It is entails of a computer-based system which controls ordering and scheduling. Its work is ensure raw goods and production materials needed are always available as required (Nahmias, 2011).