Sunday, August 17, 2008

Ordering process and inventory position

Ordering policy describes how ordering takes place in response to demand.
Ideally, we would like a policy which is optimal in some sense. However, usually such policies are quite complex. Instead, we shall settle for a simple ordering policy which is "nearly optimal". To define the policy, however, we need to introduce a new concept - inventory position.
At first glance, it might seem our ordering decision should be driven by the on-hand inventory level,
alone. However, as in life, in inventory management it pays to think ahead - in this case we need to think
one lead-time ahead. The reason is that future inventory levels are affected by both the on-hand inventory
and the orders in the pipeline that are due to arrive.
Inventory position captures this idea. Inventory position is the total amount on-hand plus the total amount on-order.
Keeping a careful eye on the inventory position reduces the nasty tendency to overshoot and undershoot
the inventory that lead times typically engender. An important fact to recognize is that we can regulate
the inventory position by simply placing an order or by holding back orders. In other words, the inventory
position is controllable.

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