Unit-1 & 2

Definition of Supply Chain

A supply chain is the

network between a company and its suppliers and customers that includes all the transactions
involved in transforming raw goods into a salable products.  

The network includes the activities, people, technology, information and resources, while the
functional teams involved in the company’s network includes sales, sourcing, procurement,
production, logistics and customer service.

Supply chain management is the coordination, management and strategy that drives the flow of
data, information, resources and materials to deliver the best product and service to all
stakeholders in the process of converting raw goods to a salable product and delivering it to the
ultimate customer.  

When the activities of a company’s supply chain are brought together into a single vision, supply
chain management drives a competitive advantage by executing faster, reducing friction through
all internal and external points, thus bringing more transparency throughout the process to
deliver a product or service that is beyond expectations of the end customer.
Objectives and Functions of Supply Chain Management

We have discussed some of the important objectives of SCM below.

 To maximize overall value generated

The higher the SCM profitability, the higher is the success for supply chain. The Supply chain
profitability is the difference between the amount paid by the customer to purchase a product and
the cost incurred by an organization to produce and supply the product to the customer.

 Cost quality improvement

This is another essential objective of SCM. It looks to achieve cost quality balance and
optimization.

 To look for sources of Cost and Revenue

Customer is the only source of revenue. Therefore there should be appropriate management of
the flow of information, product or funds. It is a key to the success of supply chain.

 Shortening the time to order

SCM aims to reduce the time required for ordering and fulfilling the same.

 Delivery optimization

The SCM aims to meet the demands of the customer for guaranteed delivery of high quality and
low cost with less lead time.

 Demand fulfilment

Managing the demand and supply is a key yet challenging task for a company or management
personnel. Its objective is to fulfil customer demand through efficient resources.

 Flexibility

SCM aims for flexibility. A Well managed supply chain provides flexible planning and better
control mechanism.

 Better Distribution

SCM aims to ensure improved distribution. It can maximize the distribution side efficiency.
Marketer or distributor can achieve optimized level distribution by using all resources that are
available properly.

 Cost Reduction
It’s another objective of SCM to reduce the system wide cost of a company to meet service level
requirement.

There are several other sub-objectives that can be derived from these long term objectives.

 Inventory reduction with the value chain;

 Reduction of warehousing costs;
 Acceleration of cash to cash cycle;
 Reduction in throughput times;
 Improvement in delivery reliability;
 Safeguarding the just-in-time supply.

Importance of Supply Chain Management

You all would know that SCM is an integral part of business and it’s essential to company’s
success and customer satisfaction. In this segment we shall look at the importance or the
significance of SCM.

 Boosts Customer Service

Customers expect the right product to be delivered and they expect it to be available at the right
location. They expect right delivery time and also right after sale support. Customers expect
products to be serviced quickly. Therefore considering all of this, the significance of SCM is
critically high.

 Reduces operating costs

Retailers depend on supply chains to deliver expensive products in order to avoid holding costly
inventories in stores any longer than it’s required. Manufacturers rely on supply chain to deliver
reliably deliver materials to avoid material shortages.

 Improves financial position

Firms value supply chain managers as they help in controlling and reducing supply chain costs. It
not only saves costs but also dramatically increases firm’s profits. Firms’ appreciate the added
value SCM contributes to the speed of product flow to customers.

 Momentum

SCM streamlines everything, from product flow to any unexpected natural disasters. With
effective SCM, organizations can diagnose any sort of problem easily.

 Integrated and co-operative logistics

SCM is the necessity of foundation for all societies. Effective supply chain meets the
requirements of producers and consumers. It takes an integrated approach towards management.

Functions of Supply Chain Management

The functions of SCM include the following:

  Purchasing

The first function of SCM is purchasing. During manufacturing process, raw materials are
needed. It is essential that these materials are procured and delivered on time. Then only the
production can begin. In order to make this happen, coordination with suppliers and delivery
companies is needed to avoid delays.

 Operations

Forecasting and demand planning is needed before materials are procured as the demand market
shall dictate how many units are to be produced and how much material is needed for
production.  This function in SCM is vital as organizations accurately forecast demand to avoid
having too little or too much inventory that would lead to revenue losses. Therefore, forecasting
and demand planning should be tied in with inventory management, production and shipping.

 Logistics

Logistics is a part of SCM that co-ordinates all planning aspects, purchasing, production, and
transportation aspects to ensure that products reach the end consumer without hindrances. It is
essential to have co-ordination with multiple departments so that products are quickly shipped to
customers. 

 Resource Management

Resource management[1] ensures that right resources are allocated to the right activities and that
too in an optimized way. It ensures that optimized production schedule is created to maximize
operations efficiency.

 Information workflow

Sharing information and distribution is that what keeps all other functions of supply chain
management on track. If this information workflow and communication is poor, it can hurt the
entire chain.
Future of Supply Chain Management

Technology development goes hand in hand in the future of SCM. Whether its allowing supply
chain teams to add or improve their current processes, newly created technologies have become
essential as we move forward. At least for the foreseeable future, there is a need for supply chain
teams to have hands on approach to various processes.

Therefore it’s vital that supply chain teams understand the importance of incorporating
technology and not being intimidated by it.

Supply Chain Management Functions

On a broader level, supply chain management consists of these four major functions and key
element components, such as:

Integration
This forms the crux of the supply chain and is meant to coordinate communications to produce
effective and timely results. It can include innovation of new software or advanced technological
processes to improve communications.

Operations
This involves management of day to day operations in the eCommerce business. For example, it
may deal with keeping an eye on the inventory or coming up with marketing approaches.
Purchasing
This deals with the purchasing decisions and management, such as purchasing raw materials,
source materials and so on.

Distribution
This deals with the management of logistics across wholesalers, retailers, and customers. This
may mean keeping an eye on the shipment, and other details.
In addition to these, there are also some subsidiary functions that an effective supply chain
management process fulfills, such as:

 Aligning distribution flows

 Integrating the functions from manufacture to delivery
 Designing complex and advanced systems
 Managing and coordinating resources
If you get the basics right and manage your supply chain in the right way, you will surely enjoy
good profits. Always remember that proper planning and implementation are the keys to
successfully achieving the objectives of supply chain management.
How to Successfully Manage Supply Chain Operations

Seamless Communication

All the aspects of a supply chain must be connected with a strong communication network. A
transparent communication will help each section progress and a constant flow of data will help
in simplifying operations.

Integration Between Processes

There must be proper synchronization between every operation to ensure the smooth functioning
of the entire supply chain. This can be attained by applying automation systems ad decreasing
the load of manual tasks.

Shipping and Transportation

Shipping and transportation must be imbibed with a strong network of pin codes so that the
entire supply chain is sorted and its role is defined. You can make use of transportation systems
or shipping solutions.

What is Forecasting in Supply Chain Management?

In supply chain management, forecasting is the act of predicting demand, supply, and pricing
within an industry. Forecasting involves investigating the competition, collecting supplier data,
and analyzing past patterns in order to predict the future of an industry. Forecasting is an
important skill for a supply chain manager to have, and it encompasses multiple skills that one
should acquire as they grow in their career.

 
1. Planning Processes
The scheduling and planning process is vastly improved through forecasting. Paying attention to
the past and present demand for products allows a supply chain to stay on top of the game.
2. Seasonal Variations in Demand
Among the many reasons that forecasting is needed in supply chain management is being able to
predict and plan for seasonal variations in demand. In a similar vein, planning for promotional
activity and product launches are just as important and benefit greatly from demand forecasting.
With data to back up predictions, there is less guesswork to fret over.

3. Predict Product Demand

In a broader sense of the term, demand forecasting allows for the prediction of product demand
in even the most specific of situations. While no company can predict the future with complete
accuracy, relying on patterns and making informed decisions based on past and present data will
get a company as close as possible.

4. Customer Satisfaction
Understanding customer needs is essential in product-focused industries. Being able to predict
customer demand will result in fulfilling orders with short lead times on time. This will also have
the effect of increasing trust between customer and supplier. 

5. Reduce Safety Stock

By definition, safety stock is the excess stock that is kept around as a safety net in case demand
for a product increases. With forecasting, however, this extra measure is not needed. This frees
up storage space and saves time and worry.

6. Reduce Inventory Stockouts

When it comes to JIT (Just In Time) systems and buying from long lead time suppliers,
forecasting demand is essential. When it comes to JIT systems, demand forecasting allows for
products to sit in storage for less time, thus less money is wasted than if items were to take up
space in the warehouse for an extended period of time. For long lead time suppliers, forecasting
demand is needed in order for suppliers to get your products to you in a timely manner. 
7. Improve Shipping
Supply and demand affect every aspect of the supply chain process. For example, being able to
predict the demand for a certain product will allow supply chain managers time to ensure that
enough workers are present to ship a certain amount of product. Not having enough workers
results in orders not getting to customers on time. Likewise, having too many workers on the
clock results in high labor costs.

8. Improve Pricing
Price forecasting puts the power back into the hands of a company. The impact price changes
have on a particular area of a supply chain can be predicted and handled accordingly. 
Get Certified in Houston

Now that you have an answer to the question “Why is forecasting important in supply chain
management?”, your next step to understanding supply chain management is to seek
certification. With several certification options to choose from, the path to a fulfilling career in a
growing industry is well within reach at APICS. Learn more about your options here.

Why is Demand Forecasting important for effective Supply Chain Management?

Demand Forecasting defined as the process by which the historical sales data are used to
develop an estimate of the expected forecast of customer demand. Demand Forecasting provides
an estimate of the of goods and services that customers will purchase in the foreseeable future. 

 Improved supplier relations and purchasing terms: Demand Forecasting drives the

raw material planning process which facilities the Purchasing Managers to release timely
purchase plan to suppliers. Visibility and transparency of raw
material demand improve supplier relations and empowers Purchasing Managers to
negotiate favorable terms for their companies. 
 Better capacity utilization and allocation of resources: Based on the current inventory
levels, raw material availability and expected customer orders, production can be
scheduled effectively. This leads to improved capacity utilization and judicious allocation
of manufacturing resources. 

 Optimization of inventory levels: A proper Demand Forecast provides vital information

for driving the desired raw material, WIP and finished goods inventory levels. This
reduces the Bullwhip effect across the Supply Chain, leading to optimization of inventory
levels and reduction in stock-out or over-stocking situations. 

 Improved distribution planning and logistics: Apart from small businesses, this is

particularly evident in businesses dealing with multiple SKUs and wide distribution
networks. Distribution and Logistics Managers are enabled to balance inventory across
the network and negotiate favorable terms with Transporters. 

 Increase in customer service levels: With optimized inventory levels and improved

Distribution Planning and Logistics, customer service metrics like on-time delivery
(OTD), on-time in-full (OTIF), case-fill/fill-rate, etc. are improved due to right sizing and
right positioning of inventory. 

 Better product lifecycle management: Medium to long range Demand Forecasts

provide better visibility of new product launches and old product discontinuations. This
drives synchronized raw material, manufacturing and inventory planning to support new
product launches and most importantly, reducing the risk of obsolescence of discontinued
products. 

 Facilitates performance management: Management can set KPIs and targets for

various functions like Sales, Finance, Purchase, Manufacturing, Logistics, etc. based on
the medium to long range plans derived from the Demand Forecasting
process. Organizational efficiency, effectiveness, and improvement initiatives can be
designed for key areas of the company. 
Supply Chain Forecasting Methods

Supply chain forecasting and weather forecasts have more than one thing in common.

The process of making predictions based on past and present information, they both use hard
data, and, at times, intuition, to varying degrees of accuracy. And in both cases, something that
didn’t appear on the radar can leave you feeling caught-out and unprepared—whether that’s
without an umbrella, or without the inventory needed to fill an order.

Understanding how to properly forecast your supply chain needs is critical to ensuring your
ecommerce store’s success. Getting it right can lead to better supplier relationships, increased
customer satisfaction, and more capital to grow and scale your business.

We spoke with supply chain management, fulfillment, and shipping experts to find out how
supply chain forecasting can make or break your store’s next quarter—and the best methods for
doing it.

4 forecasting methods used in supply chains 

Moving average forecasting

 Pros: Easy
 Cons: Doesn't allow for seasonality or trends
 Best for: Low-volume items

One of the simplest methods for forecasting, this method examines data points by creating an
average series of subsets from complete data.

As it’s based on historical averages, moving average forecasting doesn’t take into account that
recent data may be a better indicator of the future and should be given more weight. It also
doesn’t allow for seasonality or trends. As a result, this method is best for inventory control for
low-volume items.
Exponential smoothing

 Pros: Easy; takes historical and recent data into account

 Cons: Can be prone to lag, causing forecasts to be behind
 Best for: Short-term forecasts or non-seasonal items

Picking up where average forecasting leaves off, this method takes into account historical data,
but gives more weight to recent observations. It’s similar to adaptive forecasting, which takes
into account seasonality.

Variations on exponential smoothing including Holt’s Forecasting Model (sometimes called

Trend-Adjusted Exponential Smoothing or double exponential smoothing) and Holt-Winters
Method (also known as triple exponential smoothing), which factors in both trends and
seasonality.

Auto-regressive integrated moving average (ARIMA)

 Pros: Very accurate
 Cons: Costly; time-consuming
 Best for: Timeframes of <18 months

One method that fits within the ARIMA category is Box-Jenkins. Costly and time-consuming,
this time series forecasting method is also one of the most accurate, although it’s best suited for
forecasting within timeframes of 18 months or less.

Multiple Aggregation Prediction Algorithm (MAPA)

 Pros: Prevents over and under-estimating

 Cons: Still relatively new; not as proven
 Best for: Seasonal items

A relatively new method that’s specifically designed for seasonality, MAPA smooths out trends
to help prevent over or under-estimating demand. Although not nearly as popular as Holt or
Holt-Winters, research has shown it performs better.
Qualitative supply chain forecasting methods

In the case of new product or business launches when data is nonexistent or hard to come by, it
can be difficult to make supply chain forecasts. There’s also the case of historical data becoming
irrelevant or less accurate, such as when a global pandemic has skewed historical data. That’s
where qualitative forecasting comes in. 

Methods include:

1. Historical analogies
2. Sales force composition
3. Market research
4. The Delphi method

Historical analogies

 Pros: May be more accurate in the mid to long-term

 Cons: Poor accuracy in the short-term
 Best for: Similar items

Historical analogy forecasting predicts future sales by assuming a new product will have a sales
history parallel to a present product (either one sold by you, or a product sold by a similar
competitor). A comparative analysis, it has poor accuracy in the short-term, although may be
more accurate in the medium and long-term.

Sales force composition

 Pros: Fairly easy to collect

 Cons: Poor to fair accuracy
 Best for: When quantitative methods aren't feasible

Sometimes called “collective opinion,” this method relies on the personal insights and opinions
of experienced managers and staff, gathered as a team exercise. According to Harvard Business
Review, panels of this nature typically have a poor to fair accuracy.
Planning Demand and Supply in a Supply Chain

Characteristics of forecasts

Forecasts are always wrong. Should include expected value and measure of error. Long-term
forecasts are less accurate than short-term forecasts. Too long term forecasts are useless:
Forecast horizon Aggregate forecasts are more accurate than disaggregate forecasts

Several ways to aggregate – Products into product groups – Demand by location – Demand by
time period

Forecasting Methods

Qualitative – Expert opinion – E.g. Why do you listen to Wall Street stock analysts?

Time Series – Static – Adaptive Causal Forecast Simulation for planning purposes

What is inventory management?

Inventory is the goods or materials a business intends to sell to customers for profit. Inventory
management, a critical element of the supply chain, is the tracking of inventory from
manufacturers to warehouses and from these facilities to a point of sale. The goal of inventory
management is to have the right products in the right place at the right time. This requires
inventory visibility — knowing when to order, how much to order and where to store stock. The
basic steps of inventory management include:

1. Purchasing inventory: Ready-to-sell goods are purchased and delivered to the warehouse
or directly to the point of sale.
2. Storing inventory: Inventory is stored until needed. Goods or materials are transferred
across your fulfillment network until ready for shipment.
3. Profiting from inventory: The amount of product for sale is controlled. Finished goods
are pulled to fulfill orders. Products are shipped to customers.
What are the types of inventory management?

Periodic inventory management

The periodic inventory system is a method of inventory valuation for financial reporting
purposes in which a physical count of the inventory is performed at specific intervals. This
accounting method takes inventory at the beginning of a period, adds new inventory purchases
during the period and deducts ending inventory to derive the cost of goods sold (COGS).

Barcode inventory management

Businesses use barcode inventory management systems to assign a number to each product they
sell. They can associate several data points to the number, including the supplier, product
dimensions, weight, and even variable data, such as how many are in stock.
RFID inventory management
RFID or radio frequency identification is a system that wirelessly transmits the identity of a
product in the form of a unique serial number to track items and provide detailed product
information. The warehouse management system based on RFID can improve efficiency,
increase inventory visibility and ensure the rapid self-recording of receiving and delivery.

Key features of effective inventory management

Inventory tracking
Know exactly where inventory is across the supply chain.
Order management
Customize pricing, send quotes, track orders and manage returns.
Transfer management
Move product to where it's most valuable.
Reporting and analytics
Evaluate patterns in processes to forecast future demand and sales.
Purchasing
Create and manage purchase orders.
Shipping capabilities
Automate shipping to reduce errors such as late deliveries or delivering incorrect packages.

Elements of Inventory Management

Inventory management starts long before products reach the warehouse. Let’s explore the facets
of sound inventory management for companies that hire the right talent with a well-rounded
education in supply chain management.

 Inventory optimization. Think of inventory optimization as the act of balancing

inventory based on demand: not over-ordering, not under-ordering — ordering just the
right amount. Finding the sweet spot with the ideal inventory level for each item you
 stock requires a dynamic inventory management practice.

An optimized inventory management system needs supply chain visibility from raw
materials to sales data. It demands agile supply chain planning that can quickly respond
to changes in customer demand or disruption in your global logistics operations. As a
supply chain manager, you will be responsible for calculating and recalculating optimal
inventory levels to meet customer demand. Inventory management’s fluid nature is one
of the things that makes supply chain management such an exciting career.
 Transportation management. Inventory management and managing transportations are
inextricably linked. The transportation segment of your supply chain primarily from the
factory to the fulfillment warehouse or distribution center. Proactive and aggressive
transportation management is vital to just-in-time supply chain management because a
delay in transport can throw a tightly structured global supply chain into disarray. As a
supply chain manager, part of your job is to maintain visibility into your logistics
operations, create repeatable transportation systems, and stay ready to pivot swiftly to
preserve your inventory flow.
 Warehouse management. Warehouse management includes storage, distribution, and
fulfillment. Determining the best warehouse locations to meet customer demand for fast
delivery and ensuring that fulfillment operations run smoothly are essential to customer
satisfaction. Responsible warehouse management facilitates inventory visibility and
prevents loss due to damage or theft. It’s critical to include your warehousing operations
in your supply chain visibility, rather than trusting that transportations professionals can
provide the level of fulfillment services your organization needs without proper
oversight.

Techniques for effective inventory management

There are dozens of different techniques that supply chain managers use for effective inventory
management. By completing the MS SCM – Online you will be adept in various methods to
determine the proper inventory level and inventory flow for different items. Additionally,
reviewing the GSCI white paper, “End-to-End Supply Chain Planning Framework and Key
Concepts” will provide the appropriate context for this work. Below are a few standard inventory
management techniques and processes:
Demand Supply Integration (DSI or called S&Op by some SCMs): The leadership process to
make supply and demand decisions (such as investment in inventory and customer service risk)
to deliver the highest enterprise total value. This process ensures the best end-to-end decisions
and multi-functional alignment to the business plan. The GSCI white paper on “Advanced DSI
Best Practices” explains this process in detail.
ABC analysis. ABC analysis is an inventory control method that classifies products into three
tiers. Tier A products are either items that have the highest turnover or highest value. These
products also have the highest risk of being stockouts because of backordered inventory or theft
and the highest level of inventory visibility—including regular inventory control.
Tier B products don’t move as fast as those in tier A, so they are subject to less stringent
inventory management. Tier C items are the slowest sellers, so counts for tier C items are
infrequent.

ABC analysis focuses supply chain management on the products where inventory visibility is
most crucial. This inventory management practice optimizes inventory and time management.
Demand forecasting. Demand forecasting is essential to inventory management. Demand
forecasts form the basis of supply chain planning for the next quarter or the following year.
There are two basic types of demand forecasts.

1. Passive demand forecasting bases predictions on data about past sales. Passive demand
forecasting can work well for mature companies with comprehensive sales data and
stable market share.
2. Active demand forecasting incorporates growth projections and external market forces to
project customer demand. Active forecasting methods work well for startups, growing
companies, or industries where demand fluctuates based on external factors.
Supply chain management professionals and academics have developed a range of methods for
creating demand forecasts, including:

 Market research, which bases forecasts on trends that help illustrate how to expand
market share
  Salesforce composite, which relies on the sales team’s market knowledge
 The Delphi method, which creates a forecast based on the consensus of a group of experts
Reorder quantity. Reorder quantity is the inventory level at which you need to order mo

Top challenges in inventory management:   

1. Supply disruptions

The pandemic has shown us how global supply chains can bend or break down, especially if they
aren’t built for resilience. Previously, businesses prioritized efficiency and cost savings over
resilience. In the aftermath of the pandemic, businesses are focusing on mitigating the risks from
supply disruption by switching to near-shore or local suppliers, establishing supply chain risk
management teams and procedures, and adopting technology to streamline supply chain
processes and improve transparency.

2. Demand and market volatility

One of the major challenges during the pandemic has been dealing with uncertainty in terms of
demand, market trends, and consumer behavior. Such volatility and uncertainty led to several
instances of excess stock when demand fell or a lack of goods when the demand for certain
goods shot up substantially.

Dealing with such uncertainties requires the ability to gather latest data on market and buyer
trends and forecasting demand using advanced analytics to adjust production rates accordingly.

3. Lack of supply chain visibility

Three key reasons why businesses are unable to gain end-to-end visibility of their supply chains
are the use of siloed systems, historical data, and inefficient inventory and warehouse
management practices, especially those relying on manual efforts or legacy systems.

Without the ability to visualize the complete picture, it’s impossible to answer critical inventory
management questions such as the number of orders getting processed, the number of purchase
orders are on their way, or the amount of safety stock is required to keep up with demand.
4. Loss of inventory

Inefficient inventory management leads to overstocking or understocking of goods.

Overstocking, especially when the demand falls, can lead to losses from spoilage, damage, or
becoming deadstock. Understocking can cause significant damage to a brand’s reputation and
future revenues.

Now let’s look at how technology powered by AI can help resolve these inventory management
challenges.
Inventory Model & Types

Inventory also referred as stocks are basically the goods and raw materials that any business

would hold and are ready or will be ready for sale.

Inventory Model
Inventory model is a mathematical model that helps business in determining the optimum level
of inventories that should be maintained in a production process, managing frequency of
ordering, deciding on quantity of goods or raw materials to be stored, tracking flow of supply of
raw materials and goods to provide uninterrupted service to customers without any delay in
delivery.
There are two types of Inventory model widely used in business.

1. Fixed Reorder Quantity System

2. Fixed Reorder Period System.

Fixed Reorder Quantity System.

Fixed Reorder Quantity System is an Inventory Model, where an alarm is raised immediately
when the inventory level drops below a fixed quantity and new orders are raised to replenish the
inventory to an optimum level based on the demand. The point at which the inventory is ordered
for replenishment is termed as Reorder Point. The inventory quantity at Reorder Point is termed
as Reorder Level and the quantity of new inventory ordered is referred as Order Quantity.
Average Demand (DAv): It is the average number of order requests made per day.
Average Lead Time (TL): The time required to manufacture goods or product.
Average Lead Time Demand (DL): Average number of orders requested during the Lead Time
Average Lead Time Demand (DL) = Average Demand (DAv) X Average Lead Time (TL)
Safety Stock (S): It is the extra stock that is always maintained to mitigate any future risks
arising due to stock-outs because of shortfall of raw materials or supply, breakdown in machine
or plant, accidents, natural calamity or disaster, labour strike or any other crisis that may the stall
the production process.
The quantity of safety stock is often derived by analysing historical data and is set to an
optimized level by evaluating carefully the current cost of inventory and losses that may be
incurred due to future risk.

Reorder Level (RL): Reorder level is the inventory level, at which an alarm is triggered
immediately to replenish that particular inventory stock. Reorder level is defined, keeping into
consideration the Safety Stock to avoid any stock-out and Average Lead Time
Demand because even after raising the alarm, it would take one complete process cycle (Lead
Time) till the new inventories arrive to replenish the existing inventory.
Reorder Level (RL) = Safety Stock (S) + Average Lead Time Demand (DL)

Order Quantity (O): Order quantity is the Demand (Order requests) that needs to be delivered

to the customer.

Minimum Level: At least Safety Stock has to be always maintained to avoid any future stock-

outs as per the standard practices of inventory management.

Minimum Level (LMin) = Safety Stock (S)

Maximum Level: The maximum level that can be kept in stock is safety stock and the demand

(the quantity ordered).

Maximum Level (LMax) = Safety Stock (S) + Order Quantity (O)

 Figure 1: Inventory Model: Fixed Reorder Quantity System

Example: The order quantity of an Item is 600 Units. The safety Stock is 200 Units. The

Average Lead Time is 5 Days and average consumption per days is 40 units.

Order Quantity (O) = 600 Units

Safety Stock (S) = 200 Units

Average Lead Time (TL) = 5 Days

Average Demand ( DAv ) = 40 Units

Average Lead Time Demand (DL) = Demand (DAv) X Lead Time (TL) = 200 Units

Reorder Level (RL) = Safety Stock (S) + Average Lead Time Demand (DL) = 400 Units

Minimum Level (LMin) = Safety Stock (S) = 200 Units

Maximum Level (LMax) = Safety Stock (S) + Order Quantity (O) = 800 Units

Fixed Reorder Period System.

Fixed Reorder Period System is an Inventory Model of managing inventories, where an alarm is

raised after every fixed period of time and orders are raised to replenish the inventory to an
optimum level based on the demand. In this case replenishment of inventory is a continuous

process done after every fixed interval of time.

Regular Intervals (R): Regular Interval is the fixed time interval at the end of which the

inventories would be reviewed and orders would be raised to replenish the inventory

Inventory on Hand (It): Inventory on hand is the Inventory level measured at any given point

of time.

Maximum Level (M): It is the maximum level of inventory allowed as per the production

guidelines. The maximum level is derived by analysing historical data.

Order Quantity: In this system, inventory is reviewed at regular intervals (R), inventory on

hand (It) is noted at the time of review and order quantity is placed for a quantity of (M) – (It).

Order Quantity (O) = (M) – (It).

Figure 1: Inventory Model: Fixed Reorder Period System

Example: Inventory is replenished at every regular interval of 5 days. The maximum allowable

inventory is 800 Units. The inventory reviewed on Day-5, Day-10, Day -15 and Day -20 were

387 Units, 201 Units, 498 Units and 127 Units respectively.

Regular Intervals (R) = 5 Days

Maximum Level (M) = 800 Units

Inventory on Hand: I5 = 387 Units, I10 = 201 Units, I15 = 498 Units and I20 = 127 Units

Order Quantity (O) = (M) – (It).

Order Quantity (O5) = 800 – 387 = 413 Units

Order Quantity (O10) = 800 – 201 = 599 Units

Order Quantity (O15) = 800 – 498 = 302 Units

Order Quantity (O15) = 800 – 127 = 673 Units