Inventory Management Policies
Inventory management policies refer to the ordering and review discipline of inventory level. The following are some common policies used for the management of inventory.
Periodic Review policy
In this policy, the inventory level reviewed after the time period, T, and if the inventory level reached to the reorder point, r, or below the order is placed otherwise the order will not be placed. The basic parameters of this policy are R, r, and T, where the R shows the maximum target inventory level, r shows the minimum inventory level or reorder point, and T is the review period. The ordering quantity will be Q = R-I if I<= r. and Q = 0, if I> r.
This policy is best suited with small and inexpensive items (Class B, C) because of its more uncertainty and greater safety stock than continuous review policy.
Continuous Review Policy
In this inventory management policy, the inventory level is continuously reviewed and order of Q = R-I are always placed when the inventory level reached to the reorder point, r, or below. This policy is not time-dependent on the length of the time period. The only parameters of this policy are the target inventory level, R, and reorder point, r.
Fixed Order Quantity Policy (Q, r)
This policy is same to continuous review policy but each time when the inventory maximum level (Q + r) reach to the reorder point, r, or below a fixed order of, Q, will be placed for replenishment. The only parameters of this policy are, Q, and r denoted by (Q, r). The class A items are slow-moving and highly expensive so therefore in the methodology chapter of the project this continuous policy used for Class A items and researchers also preferred this continuous policy for the defining inventory control parameters for slow-moving and expensive items. Using this continuous policy there is a significant reduction reflect in the total inventory investment of the company because it defines small safety stock for the items with the same level of spare parts availability and service level.
This policy is the special case of the periodic review policy. In this policy the reorder level of the inventory keeps exactly to the maximum targeted level of the inventory, r = R. At the end of each review period, T, the order of size Q = R-I is placed for the inventory replenishment. The only parameters to define this policy are T, and R.
Base Stock Policy (S, s-1)
In this policy order placed after each withdrawal from the inventory. In this policy, the reorder level set to r = R. The sum of the on-hand inventory, I, and the order quantity, Q, minus the back order quantity must always be equal to R. The target inventory level, R, refers to base stock level. Order quantity will be Q = R- I + backorder. The base stock model uses this policy.