Inventory replenishment policy

What is inventory replenishment policy?

Inventory replenishment policy is a set of rules and procedures that a business uses to determine when and how much inventory to order or produce to meet customer demand while minimizing costs and maximizing efficiency. The policy outlines the process for replenishing inventory levels to ensure that the right products are available at the right time to meet customer demand.

A company can either replenish their inventory through continuous or periodic review.

What are types of inventory replenishment policies?

• Reorder point (ROP) policy: This policy involves setting a specific level of inventory at which a new order is triggered. When the inventory level falls below the reorder point, a new order is placed to replenish the inventory back to a predetermined level.
• Economic Order Quantity (EOQ) policy: This policy involves calculating the optimal order quantity that minimizes total inventory cost. The EOQ is calculated based on the cost of ordering and the cost of holding inventory.
• Just-in-time (JIT) policy: This policy involves ordering or producing inventory only when it is needed, with the goal of minimizing inventory levels and associated costs.

Best practices to increase profit

Firstly, it is important to get the correct balance of inventory. You must have enough stock to cover your forecasted demand, but you don’t want to tie-up too much capital in items sat in a warehouse. As a result, you need to prioritize which inventory items to reorder, for example by using a basic ABC classification system.

Secondly, you must set realistic service level targets. In some sectors demand is more volatile, so it is not appropriate to set high service levels e.g. 99,99%. Instead set relevant service level targets. For example, items that are stocked well would potentially have higher service level targets, whilst lower stock levels could have lower service level targets.