Inventory management

Inventory management is the ongoing process of moving parts and products into and out of a
company’s location(s). Companies manage their inventory on a daily basis as they place new
orders for products and ship orders out to customers. It’s important that business leaders gain a
firm grasp of everything involved in the inventory management process. That way, they can
figure out creative ways to solve inventory management challenges by finding the right
solutions.
Inventory Policies

Inventory policy is an operating framework or a standard operating procedure (SOP) in

implementing an inventory model. Obviously, the inventory model will depend upon the choice
of inventory policy adopted. Typically, an inventory policy results in an inventory graph as a
function of time. This visually depicts how the inventory status changes over time and when does
procurement intervention take place.
In practice, three inventory policies are normally employed. These are described as follows:

1. Economic Order Quantity (EOQ)-Reorder Point (ROP) Policy

Under this policy, the inventory status is continuously monitored. Whenever the inventory level
falls to a predetermined level called as reorder point (ROP), a replenishment order of fixed
quantity called economic order quantity (EOQ) is placed. Thus EOQ (Q) and ROP (R) are the
two decision variable involved in solving the problem of how much to buy and when to buy.
Following graph shows the graphical operation of the (Q, R) policy. Such inventory model must
have (Q, R) as decision variables.

2. Periodic Review Inventory Policy

The stock status is periodically reviewed under this policy after a fixed time interval (T). When the
review period is reached, the order is placed which is determined by the following relationship:

Q ¼ order quantity ¼ ð S XÞ

3. Optional Replenishment Policy

This is a variant of periodic review inventory policy wherein there are two levels of inventory
identified as S (the maximum level) and s (the minimum level). The stock levels are periodically
examined at fixed time interval T. However, if the stock levels are more than the minimum level
(s) at the time of review, the replenishment decision is deferred to the next review cycle, and no
order is placed because the current stock is deemed to be adequate for the time being until the
next review cycle. If, at the time of review, the stock level (X) is less than or equal to (s), then
the order quantity Q is determined so that it raises the stock level to S.
Thus under this policy,

Q ¼ S X if X s
¼ 0 if X > s