# Inventory Policies

Inventory policies determine how much to order ⚖️ and when. 📆.

Policies come in two types, based on when the review is conducted:

Continuous review: order can be made at any time.
Periodic review: order can only be made at specific times.

On hand inventory:
Inventory physically available for a customer to purchase.

Backorder:
Backlog of open orders not yet fulfilled, and not yet lost. When there is not enough on-hand inventory to fill orders directly.

Net inventory:
Inventory that includes on-hand inventory and in-transit inventory, excluding backorders and orders not yet shipped.

In-transit Inventory:
Inventory that is in-transit between two locations.

(s,Q) policy in a nutshell:
When the stock reaches 2 units, I will order 10 units.

Products in this policy are ordered on a fixed threshold - as soon as the net inventory goes below the threshold, a pre-determined number of units are ordered (reorder point (ROP)).

The elapsed time betwee two consecutive orders will vary, but the order quantity will always be the same.

Advantages	Disadvantages
-Good for expensive items -Can make an order when you need to -Can optimize the order quantity	-Won't allow you to group into a single order -Assumes you can make an order with supplier at any time -Can only buy one product at a time

Notation: (s, Q), where s is the reorder point and Q is the order quantity.

(R,S) policy in a nutshell:
We make an order every week to bring the stock up to 12 units. If we have 5 units on the order date, we will order 7 units.

Products in this policy are ordered on a fixed schedule to the up to level. We will order a different quantity each time, but the time between two orders will always be the same.

Advantages	Disadvantages
-Allows grouping of orders -Most common policy	-Cannot order in-between two review periods. -Quantity will vary each order, affecting palleting/shipping.

Notation: (R,S) where R is the fixed review period and S the up-to level.

Watch-out: s is usually denoted the reorder point (minimum amount of stock) and S the up-to level (maximum).

(R,s,Q) policy in a nutshell:
Every Friday if I have less than 4 units in stock, I will order 8 units.

This policy combines both previous policies - making orders of a fixed quantity Q, on a fixed schedule R, if the inventory level is beneath the minimum stock s.

Advantages	Disadvantages
-Constant order quantity, optimizing transport. -Allows grouping of orders.	-Cannot order in between two review periods. -Only make the order if the stock is beneath the threshold.

Notation: (R,s,Q) where R is the fixed review period, s is the reorder point, and Q is the fixed order quantity.

(R,s,S) Policy

Inventory is reviewed periodically R, and if the inventory is below threshold s, an order is placed up-to level S.

Multiple Sourcing Policy

Supply chains may build in multiple supply lanes in order to reduce supply risk, for example an emergency supply lane with a preferred supplier. These types of policies introduce more complexity that requires simulation to optimize.

# So what is an "Inventory Target"?

As you can now tell, operational definition is important when desribing supply chain policies. When working with others and discussing inventory, always clearly define what a 'stock target' and a 'reorder point' are referring to.

See also: Supply Chain Costs for cost optimization based on these policies, and Supply Planning for how inventory targets fit into the broader supply plan.