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Inventory Crash Course

Jan 25, 2021

Lesson 5: Ordering

It doesn’t do you any good to have a meticulously crafted inventory policy if your ordering process is haphazard.

You have to place Purchase Orders in line with your stocking policy, otherwise, you’re going nowhere. Different classes of items should be ordered differently. Here’s a look at some different classes of items:

Obsolete items

Never order these! Even if your supplier gives you a good deal or a good incentive, don’t order them. They will only gather dust in your warehouse and cost you money. Ultimately, you’re going to throw these items out and write them off.

Non-stocked items

Only order these if your customer has ordered them from you and you don’t have enough inventory to fulfill the customer order. Don’t order a single unit more.

All other items

Remember the min and max levels you calculated previously? Just a reminder: the minimum level is your Safety Stock level in days. The maximum level is the Safety Stock level + the Replenishment Cycle in days. We should identify all items that are below the min level and order them.

One small complication here is the Lead Time for getting the items from your supplier. You have to find the items that will be below the minimum level after the lead time. That way, if you order those items today, the stock level will be at the minimum level the day the next shipment arrives from your supplier. The safety stock at that point should buffer you from late deliveries, under deliveries, or under forecasts.

An example

Let’s say you have an item forecast to sell 100 units per month, every month and this is your policy:

• Lead Time – 20 days
• Safety Stock – 15 days
• Replenishment Cycle – 30 days

From order placement until the end of the Lead Time, according to the forecast, you would sell 67 units (20 days at 100 units per month). The safety stock for the item would be 50 units (15 days at 100 units per month). Therefore, the trigger to determine when an order should be placed can be calculated as:
RE-ORDER POINT = Lead Time (67 units) + Safety Stock (50 units) = 117 units

If your current net stock position (stock-on-hand + on order) is less than the re-order point of 117 units, you need
to place an order now. Let’s say your net stock is 110 units – this is below the re-order point of 117 units, so,
next, you need to calculate how much to order?

Add your Replenishment Cycle to your re-order point to calculate an ORDER UP TO level. That’s another 100 units (30 days at 100 units per month).
ORDER UP TO = RE-ORDER POINT (117 units) + Replenishment Cycle (100 units) = 217 units

To calculate the recommended order in this instance:
RECOMMENDED ORDER = ORDER UP TO (217 units) – Net stock (110 units) = 107 units

By placing an order of 107, you will drive your inventory level towards your stocking policy.

Of course, there may be other factors that influence the order. Your supplier may have some constraints in place,
such as a minimum order quantity or pack size. These constraints may force you to order more than the number
you ideally require.

Filling a container

The above example is good for calculating the perfect order for a single item. But you probably want to order all the items from a specific supplier at the same time.

You could set up a spreadsheet to calculate the recommended order for all the items supplied by a specific supplier.

This will form the basis for the Purchase Order you’ll create in your ERP system. There may be more manipulations that you have to perform. Here are some examples:

You may need to fill containers before the supplier will ship anything to you. However, the last thing you want to do is just randomly add items to the order. Or add items where the supplier may give you a large discount.

One of the best strategies to add more items to the container is to look at items where the available inventory is still above the re-order point, but already under the order-up-to point. These items will come up for ordering in the next order cycle.

So for each of those items, you can simply place an order for the difference between the order-up-to level and the current inventory level. Keep adding the most important items first (think A items) until you’ve met the container size constraint.

Using this method you will still drive your inventory levels towards your ideal Stocking Policy, but you may be slightly in excess on certain items. Make sure you’re in excess on High-Velocity items so that the excess situation won’t last too long.

Back to the ERP

Once you have your spreadsheet of recommended orders, you can now open up a new Purchase Order on your ERP system on the supplier. Capture the products and their order quantities from the spreadsheet into the Purchase Order. Double-check that you have not made a mistake. These can be very costly, especially if you capture the wrong product code or order quantity.

Once you’re happy with the Purchase Order on the ERP, you can send that off and start the whole process again for the next supplier.

Happy ordering!

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