of a number of units requested for a number of items, and some organisations target the percentage of orders (rather than items) completely satisfied directly from stock on hand. (This is the ‘order fill rate’, which is further discussed in Chapter 3.) In this case, a non‐stock decision, taken on the basis of individual SKU requirements only, may be reversed based on collective considerations.
2.3.1 Stock/Non‐Stock Decision Rules
Having taken contractual and other constraints into account, a careful evaluation of whether an item should be stocked at all is needed. Such decisions typically rely upon an evaluation of the cost of keeping an item in stock, and the cost of not having an item in stock (see, for example, Croston 1974; Tavares and Almeida 1983). These are the two pillars upon which much inventory theory has been built, and so a detailed discussion of them is warranted.
The cost of keeping an item in stock is typically estimated based on the inventory holding charge (
Usually, the inventory holding charge is set to be the same across an entire stock base. (At the time of writing, inventory holding charges in the range 10%–25% over a year reflect a good proportion of real‐world cases.) However, this ignores the fact that intermittent demand items have a higher risk of obsolescence. This should be reflected by inventory holding charges that are higher than those imposed on faster‐moving SKUs. Better informed inventory systems do distinguish between non‐intermittent and intermittent SKUs, fixing the inventory holding charge for the former category and appropriately inflating it for the latter. The necessary degree of inflation depends on the industry and the nature of the products, which determines both the cost and environmental implications of disposing of an obsolete item. In our experience, it would vary between 3% and 5% over and above the inventory holding charge assumed for the faster‐moving SKUs (see, for example, Trimp et al. 2004). The inventory holding charge does not take into account ordering costs, which are often omitted from stock/non‐stock rules. Ordering costs do tend to feature in determining inventory replenishment policies, to be discussed later in this chapter.
The cost of not having an item in stock is typically estimated based on a charge that specifies the penalty cost of running out of stock. Such a charge will be different for cases where sales are lost and those where unsatisfied demand may be backordered (i.e. satisfied as soon as some stock becomes available again). Let us focus on the backorder case here; we return to the differences between lost sales and backordered demand later in the chapter. The backordering charge (
In the first case, the backordering charge is typically set subjectively to reflect costs arising from expediting orders, loss of customers' goodwill, and negative word of mouth publicity. Expediting charges arise by ordering emergency replenishments from suppliers, which come at a (considerably) higher cost than normal replenishments.
The second case is more relevant in a maintenance spare parts context, as each unit short could result, for example, in a machine being idled, with the idle time being equal to the duration of the shortage. So, for the example considered above (with monthly time units and
In both cases, the backordering charge is typically in the range of 5 up to 30 (or even more) times higher than the inventory holding charge, and this reflects the asymmetric costs of under‐stocking and over‐stocking. All else being equal, it always costs more to run out of stock by one unit than to keep in stock one unit that remains unused over a unit time period.
Then, why do we consider the possibility of not stocking an item at all? This is because, over time, it may indeed be more beneficial to allow for a potential (forthcoming) shortage, rather than having to carry an item in stock for a very long time. For example, if
Early work in this area by Tavares and Almeida (1983) proposed a rule, along the lines discussed above, for the stock control of very slow moving spare parts in large production systems, such as ship repair yards and light steel mills. The decision rule was developed in order to decide whether it is economic to have one item in stock or none. In particular, a threshold level of the mean demand was proposed, equal to
For the example offered above,
