Developing Effective Policies for Stocking Products
by Jon and Matt Schreibfeder

The goal of effective inventory management is to “meet or exceed customers’ expectations of
product availability while maximizing net profits.” This goal is accomplished by having the
right quantity, of the right item, in the right location, at the right time. But often organizations
fall short of achieving this goal. They have a lot of products no one wants to buy. At the same
time, they don’t have an adequate supply of items customers expect to be available for
immediate delivery.

Fortunately creating and implementing “stocking rules” does not have to be an overwhelming
process. Over the next several months, we will explore how to set up effective policies and
procedures for determining what products should be maintained in inventory and replenished on
a regular basis.

At least seven major challenges will be covered including:
1. How often must a product be sold or used to remain a stock item?
2. When should you consider changing a repeatedly ordered non-stock item to a stocked
3. When should you stock a product even though it doesn’t experience the minimum
amount of demand determined in topic #1?
4. What information is necessary to successfully introduce a new product into inventory?
5. When is it advantageous to stock a product for a specific customer?
6. Do all stock items have to be maintained in each of your warehouses?
7. How do you determine when a product should be discontinued?

When you stock a product you are making a commitment to have reasonable quantities of
that product available for immediate delivery. Many companies use an “informal” method of
determining what products to have in their inventory. Perhaps a salesperson wants to stock a
product for a specific customer, or more of a non-stock item needs to be purchased than will be
sold to the customer. And, while products are continually added to inventory, few organizations
have a procedure for discontinuing items that are no longer in demand.

Most ERP software packages have a stockable flag for each item in each warehouse. If the flag
is set to “yes”, the system will calculate replenishment parameters to maintain the item in stock.
If the flag is set to “no”, only quantities of the item will be acquired to fulfill existing customer
orders. That is, none will be left in inventory after existing customer demand has been filled.
Unfortunately, we have seen many instances where this “static” flag has prevented a non-stock
product that has gained popularity from becoming a stocked product.

Best practice is to adopt a “dynamic” stocking flag. For example, you might specify that for a
product to be stocked and its inventory replenished by your ERP system, it must have had usage
in at least “x” of the past 12 months with some of that usage occurring with the past “y” months.
While these settings are subjective, many of our clients will normally stock a product if it has
had usage in at least three of the past 12 months with some of that usage occurring within the
past four months. Products that do not meet these criteria will be considered non-stock
products until usage increases.

If you lower the number of months a product needed to have usage, you will provide more
product availability, but also increase your investment in stock inventory. For seasonal
items, you might specify that an item had to have had usage is a specific number of consecutive
months within the past year. Perhaps new items might be maintained in inventory for a trial six-month period before their stock status is evaluated. We’ll discuss each of these situations as we
proceed through major stocking challenges in the next several articles..

Customers often cannot anticipate their needs in advance. That is why you maintain stock
inventory. You want to ensure that the money invested in this list of products is wisely invested.
As always, please contact us if you would like to discuss your specific situation.