Getting goods of the right quantity is one of the FIVE Rs of procurement. There are a number of factors that determine the ‘right quantity’, things like demand for the final products, market conditions, the inventory policy of the organization etc.
The inventory policy of the organization will determine the type of system the organization has in relation to its stock replenishment. At some point an organization has to make a choice between push and pull systems of inventory control.
WHAT IS PUSH INVENTORY MANAGEMENT SYSTEM?
As an organization policy, push inventory management system means having a system that monitors stock levels and plans to replenish them in time to meet forecast demand. This way you keep as little stock as safely possible but you still end up having the right quantity at the right time. The key aspect of this system is forecasting the need for the stock.
There are two main methods used when applying the push inventory management system and these are:
- Periodic review systems
- Fixed order quality systems
Periodic review system
Under this type of system the stock level of an item is reviewed at given intervals (time) and depending on the quantity levels, a replenishment order is placed for the quantity desired to ‘top up’ the stock back to the desired level.
This system can also be referred to as a topping up or fixed interval ordering.
There are a number of factors that determine how long it will take before you do your stock review such as your safety level, the type of goods, how you have categorized them etc., after all if the reviews are done within a shorter time frame that could require more effort and cost. This is often why some organizations use ABC analysis.
ABC Analysis is an approach in which items are classified in accordance to their consumption value, that is, the total value of an item consumed over a specified time period, for instance, category A items might be reviewed weekly, category B items monthly and category C items quarterly.
Fixed order quantity system
In this system the stock of an item is replenished by an already determined quantity when the inventory level of the given item hits a predetermined minimum level, which is also known as the re-order level (ROL). The difference between this system and the periodic system is that in this case the quantity is fixed, meaning that when stocks get to a given level we order more by an exact number, while in periodic system we make the orders based on fixed time, e.g, weekly or monthly.
Related: When should you order for more units?(VIDEO)
WHAT IS A PULL INVENTORY SYSTEM?
Under pull inventory management system goods are produced in response to actual demand which could be in the form of customer’s orders. With these sorts of systems demand is much more certain and that could also mean low inventory levels. Example of this system is Just in time production.
Conclusion
Inventories are key to your production process and before implementing push and pull inventory systems, you always need to understand that with inventory there is 1) an acquisition cost. This is the cost incurred when orders are placed. You can always minimize these costs by making fewer, larger orders but the trade-off is 2) holding costs. Holding costs will include, the cost of working capital tied up to stock, the cost of storage, cost of damages etc. You could seek to minimize these costs by looking into the frequency of your orders which will mean being careful not to increase your acquisition costs. But this is a problem you can fix by using Economic Order Quantity (E.O.Q) which we shall look at in the next article. DON’T FORGET TO JOIN ME IN YOUTUBE FOR VIDEO LESSONS BY CLICKING HERE>>