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The 4 Inventory replenishment models

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Now that you should know about the Economic Order Quantity (EOQ) model, the next step is to answer the following question:

  • When to order? Either at fixed period or according to a minimum stock level
  • How much to order? Either to replenish to the maximum stock level or variable quantity

 

Four inventory models are commonly used to face those issues:

Again bear in mind that those models are rather for non-planned items (non MRP items), where demand is stable over time (no significant change) and independent from other items.

 

  • Fixed replenishment (M1): simplest model where period and quantity are fixed. So this is advisable only for low acquisition cost items where demand is constant over time:

 

  • Order point (M2): This model is used when the demand is highly variable over time, and we assume can monitor the inventory level to properly reorder on time. Also we assume the delivery time to be constant even though order periods are not (!)

The order point (Op) is simply computed with the average demand per day multiplied by the delivery lead-time so that to be fully replenished when the stock level is down to the safety stock level. Please check our spreadsheets available for use.


This model is suitable for example for spare parts or screws where orders are not regular due to low consumption or high minimum order quantity compared to daily consumption.

 

  • Periodic replenishment (M3): The idea is to replenish the stock level up to the maximum quantity (target level Qmax) at fixed period (weekly or monthly):

The target level (Qmax) is computed by multiplying the average consumption per day with the consumption period (T) and the delivery leadtime. Safety stock is obviously kept. Please check our spreadsheets available for use.


We should note that this model is not relevant is the demand is not constant; the safety stock would be really high in such case. Better to use the reorder point model (M2) if the demand is variable.

 

 

  • On-demand replenishment (M4): This model is used for high cost items where specific attention should be set as consumption and delivery are variable.



Last modified on Wednesday, 29 August 2012 15:00

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