I was reviewing replenishment parameters for several inventory items with a client this week. We ran across an item where a buyer had established a minimum stock level of 10 pieces and a maximum stock level of sixty pieces. The item is typically sold 10 pieces at one time so I understood the minimum of 10 pieces. They wanted to reorder the product when they had no less than 10 pieces on the shelf. But I questioned the maximum quantity of 60. How did they come up with that number?
“That’s easy”, said the buyer, “the vendor sells us the product in a box of 50 pieces. When we get down to the minimum of 10 pieces we want to order one box.” This buyer’s simple logic will probably lead to a significant over stocking problem. To best explain why let’s continue the interview with the buyer.
I asked what quantity the buyer would use for the maximum stock level if he could buy any amount of the product. He responded 30 pieces, enough to fill three typical customer order quantities. Using this example, I explained how his company’s common practice of rounding maximum quantities to the next multiple of the vendor package quantity will bloat his inventory.
When the net available quantity (On Hand – Committed on Outgoing Orders + Quantities Currently on Replenishment Orders) of a product in his warehouse reaches or falls below the minimum stock quantity, his computer will order enough of the product to bring the net available quantity up to the maximum stock quantity. This needed quantity will be rounded by his computer system, if necessary, to the next multiple of the vendor package quantity.
“That’s why we set the minimum and maximum quantities to 10 and 60 for this item!” the buyer interrupted.
“But”, I continued, “what if the net available quantity fell to five pieces before you issued a replenishment order?. The system would calculate the difference between the maximum quantity and the net available quantity and want to order 55 pieces. (60 piece maximum – 5 piece net available quantity = 55 pieces). Your software’s replenishment program will then round this quantity to the next multiple of the vendor package quantity and suggest an order of two boxes or 100 pieces. Remember that you wanted a maximum of 30 pieces instead you will land up with over 100 pieces in stock.”
The suggested purchase order program of most computer systems rounds purchase quantities to the next vendor package. Had the buyer set the maximum to 30 pieces, his system would only order one package of 50 pieces when the product’s net available quantity dropped below the minimum stock level. His company would have been slightly overstocked (i.e., 55 pieces) rather than grossly overstocked (i.e., 105 pieces).
Always set your maximum quantities (as well as your other replenishment parameters) to what you want them to be regardless of how much you have to order.
Let your software round needed quantities of each product to the next multiple of the vendor package during the replenishment process.
Next month we will look at another reason why the practice of rounding replenishment parameters to vendor packages will inhibit your progress in achieving the goal of effective inventory management.