# Inventory Policies

Inventory policies define when to reorder and how much to order. In IBP, they connect service level targets to working capital and operating cost decisions.

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.

# When to Use Which Policy

Policy	Best Fit	Main Trade-off
(s,Q) Continuous review, fixed quantity	High-value items, variable demand, frequent monitoring	Better responsiveness, but harder to consolidate orders
(R,S) Periodic review, order-up-to	Broad SKU portfolios, scheduled ordering windows	Easier ordering rhythm, but less responsive between reviews
(R,s,Q) Periodic review with threshold and fixed lot	Transport-constrained or MOQ-sensitive flows	Better shipment efficiency, but added policy complexity

# Continuous Review Policy `(s,Q)`

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

In this policy, an order is triggered whenever inventory falls to or below a reorder point s, and every order is the same size Q.

The elapsed time between two consecutive orders will vary, but the order quantity stays fixed.

Advantages	Disadvantages
Good for expensive items and volatile demand Orders can be placed exactly when needed Fixed lot sizing supports EOQ logic	Harder to group purchases across SKUs Requires frequent inventory monitoring Can create frequent small orders

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

# Worked Example `(s,Q)`

Reorder point s = 120 units
Fixed order quantity Q = 400 units
Current net inventory drops to 115 units
Action: place an order for exactly 400 units

# Periodic Review Policy `(R,S)`

(R,S) policy in a nutshell:
Every Friday, order enough to bring stock up to 12 units.

Inventory is reviewed on a fixed interval R. At each review, the order quantity varies to bring inventory up to target S.

Advantages	Disadvantages
Allows grouped ordering and transport efficiency Easy to operate with weekly or biweekly cadence	Cannot react between review dates Variable order quantity complicates pallet and dock planning

Notation: (R,S), where R is review interval and S is order-up-to level.

# Worked Example `(R,S)`

Weekly review (R = 1 week)
Order-up-to level S = 1,000 units
Inventory at review time is 640 units
Action: place an order for 360 units

# Periodic Review with Threshold and Fixed Lot `(R,s,Q)`

(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 periodic review and threshold logic: on each review date, place a fixed quantity Q only if inventory is below s.

Advantages	Disadvantages
Constant order quantity improves transport planning Still allows scheduled review rhythm	Cannot order between review periods Policy tuning is more complex than `(s,Q)` or `(R,S)`

Notation: (R,s,Q), where R is review interval, s reorder point, and Q fixed lot size.

# Worked Example `(R,s,Q)`

Review every Friday (R = 1 week)
Reorder threshold s = 300 units
Fixed lot Q = 500 units
If Friday inventory is 280, order 500
If Friday inventory is 340, order 0

# Service and Cost Implications

Policy	Service Level Behavior	Cost Behavior
`(s,Q)`	Usually strongest responsiveness for volatile demand	Can increase ordering frequency and freight touches
`(R,S)`	Stable service when demand pattern is predictable	Better ordering consolidation and handling efficiency
`(R,s,Q)`	Balanced response if thresholds are well tuned	Good transport efficiency, but risk of stock dips between reviews

Choose policy based on required service level, supplier constraints, and cost priorities. Most organizations run a portfolio of policies by SKU segment instead of one policy for all items.

# Inventory Target vs. Reorder Point

Operational definitions must be explicit:

Reorder point (s): inventory trigger where replenishment logic starts.
Inventory target (S): desired stock position after replenishment in order-up-to policies.

When discussing "stock target," always state whether you mean a reorder threshold, an order-up-to level, or a safety stock target.

Supply Chain Costs for cost optimization across policy choices.
Supply Planning for how inventory targets fit into the broader supply plan.

# Inventory Policies

# When to Use Which Policy

# Continuous Review Policy (s,Q)

# Worked Example (s,Q)

# Periodic Review Policy (R,S)

# Worked Example (R,S)

# Periodic Review with Threshold and Fixed Lot (R,s,Q)

# Worked Example (R,s,Q)