Types of Inventory Policies

R,Q
R,Q is a fixed replenishment point/fixed replenishment
quantity inventory policy.  When the inventory level on-
hand falls below a certain replenishment point, R, the site
will generate a replenishment order for a certain quantity,
Q, of this product.  When using this policy, the Reorder
Point field is set as the trigger level.  The Reorder/Order
Up To Qty field will be the exact number of units
reordered.
 
s,S
s,S is a minimum/maximum inventory policy.  When the
inventory level on-hand falls below a minimum, s, the site
will generate a request for a replenishment order that will
restore the on-hand inventory to a target, or maximum,
number, S.  When using this policy, the Reorder Point field
is the minimum, or trigger level.  The Reorder/Order Up To
Qty field is the maximum, or the number to which the
inventory level is restored.
 
The main difference between s,S and R,Q is that the s,S
takes into account exactly how far below the reorder level
the inventory is when the request for replenishment is
generated.  In our two examples above the R,Q will
always generate a reorder for 100 units; the s,S will
generate a reorder for at least 50 units, but probably more,
depending on how far below the trigger level it is when the
inventory is checked.  
 
The behavior of the system depends on how often
inventory is checked.  So, it is important to select the
appropriate Review Period.
Demand Flow
In Demand Flow policy, there is no strict inventory control.
Instead, every order that arrives at this site for this product
will generate a request for a replenishment order for the
exact same quantity.  All requests are driven by the actual
demand quantities received at this site for this product.
Therefore, the Reorder Point and Reorder/Order Up To
Qty fields are not used in this policy.
However, you should still establish an initial inventory
level.  By establishing an initial inventory level, the site will
always replenish exactly what was consumed by actual
demand, whether it was filled immediately, or left unfilled
as a back order.
 
Though it seems straightforward, Demand Flow can
exhibit complex behavior, especially when combined with
Review Period.  Defining a Review Period can produce
batching.  Batching occurs when the replenishment orders
accumulate during the Review Period ends and are then
filled.  
 
Days of Supply, Demand-Based
Days of Supply (DOS) - Demand is similar to an s,S
inventory policy except that the parameters for minimum
and maximum levels are specified in number of days
rather than product quantities.  This policy computes the
daily average of product by looking back at the actual
demand.  How far back to look is given by the DOS
window field.
Days of Supply , Forecast-Based
DOS - Forecast is similar to an s,S inventory policy except
that the parameters for minimum and maximum levels are
specified in number of days rather than product quantities.
This policy computes the daily average of product by
looking forward and using forecasted demand.  How far
forward to look is given by the DOS window field.
Forecast quantities must be entered into the forecast
table.  
 
In short, DOS-Demand establishes inventory based on
what has happened; DOS-Forecast establishes inventory
based on what you expect to happen.
R,Q Targets
The ”R,Q Targets” inventory policy allows the user to
change the Reorder Point (R) and Reorder Quantity (Q)
based on a period of time designated by the user (year,
quarter, month, day, etc.)
 
When using the R,Q Targets inventory policy, the
quantities and period are specified in the Forecasts input
table.
s,S Targets
The regular s,S policy is a minimum/maximum inventory
policy that says that when the inventory on-hand falls
below a certain minimum s, the site will request for a
replenishment order that will restore the on-hand inventory
to a maximum number, S.
 
”s,S Targets” inventory policy is just like the regular s,S
policy except that you can specify Reorder Point (s) and
Order up to Quantity (S) for certain periods. You can
define the period as days, weeks, months, years, quarters
etc.
 
When using the s,S Targets inventory policy, the
quantities and period are specified in the Forecasts input
table.
 
 
 
A SUMMARY OF COMMONLY USED INVENTORY POLICIES
August 1, 2016 Kumar Singh Supply Chain One comment
Defining an Inventory policy has become a strategic
exercise in today’s competitive landscape. Organizations
have plethora of product mixes these days which tend to
make the process of defining inventory policies make
 complex. However, at a very high level, there are four
types of Inventory policies that are widely used. While I
intend to write a separate post on what are the Key steps
you need to take to define an Inventory Strategy for your
organization, the purpose of this post is to summarize the
four widely used Inventory Policies.

What is an Inventory Policy?

To simplify it, Inventory policy helps you answer the

following questions:

 How frequently should I review my Inventory position

for an item?
 How much should I order?
 When should I order?

These questions essentially mean that there are two key

aspects in your Inventory management process:

 Review period
 Inventory Position
 Order Point
Review Period: You can chose to implement a
continuous review policy or a periodic review policy. If you
are using ABC Classification, you will generally chose
Continuous Review for your A and B items and periodic
review policy for your C items.
 Inventory Position: For a detailed explanation of
Inventory position, please refer to my post “Challenges in
implementing an Inventory Policy”. The simplified formula
for Inventory position is:

Inventory Position = Inventory On Hand + Inventory on

Order – Backorders

Order Point: Order point essentially is the Inventory

position value at which you place your order.

Four Key Policies

The four key Inventory policies that we are going to

summarize here can be categorized in two buckets:

Continuous Review Policies:

 (s, S)- Small s denotes re-order point and Large S is

the Order up to Level
 (s,Q)- Small s denotes re-order point and Q is the
Economic Order Quantity
Periodic Review Policies:

 (R, S)-R denotes review period and Large S is the

Order up to Level
 (R, s, S)-R denotes review period, Small s denotes re-
order point and Large S is the Order up to Level
We will now highlight the key points of each of these
polices:

The (s, Q) Policy

The Policy in (s,Q) policy is:

Order your Economic Order Quantity Q, every time your

inventory position drops below s (Reorder Point). It is
called a two bin system as you have two Inventory Bins:
One is your Cycle Inventory and another bin consists of
Demand during lead time and Safety Stock.
The (s, S) Policy

The Policy in (s,S) policy is:

Order up to a level S (so your order quantity is S-

Inventory Position), every time your inventory position
drops below s (Reorder Point). It is also called a Min-max
system as the policy says that you can order a Max of S
when you reach the min of s.
The (R,S) Policy

The Policy in (R,S) policy is:

Order up to a level S (so your order quantity is S-

Inventory Position), every R time periods (R is the Review
Period)
The (R,s,S) Policy

The Policy in (R,s,S) policy is:

Order up to a level S (so your order quantity is S-

Inventory Position), every R time periods (R is the Review
Period) if Inventory Position is less than or equal to s
(Reorder Point).
 

This overview is pretty high level. In real world, there are

multiple challenges to implementing these policies as
determining Order Point and Inventory Position is not that
straight forward. These challenges have been discussed in
the article “Challenges in implementing an Inventory
Policy”.
Link

http://www.me.utexas.edu/~jensen/ORMM/supplements/
models/inventory/rs_policy.pdf

http://www.me.utexas.edu/~jensen/ORMM/supplements/
models/inventory/sq_policy.pdf