on average), then we should not stock that item. (The symbol Johnston et al. (2011) examined the inventory system at Euro Car Parts and demonstrated that, for practical purposes, stock/non‐stock decisions may rely upon the number of movements over a particular time interval. ‘Movements’ are demand incidences that lead to an issue of stock. For unit sized demands, the number of demand incidences is equal to the demand over the same time interval.
The rule offered by Johnston et al. (2011) was derived empirically, following a comprehensive analysis of the stock base of the company. The researchers evaluated the stockout and inventory implications associated with alternative stock/non‐stock cut‐off points and found that a boundary of three movements (over a year) offered the best results: if there are three or more movements per year, then stock this item; else, do not keep it in stock. The implementation of the new rule at Euro Car Parts resulted in a 29% improvement in stock turn, at a time when no other major changes were made to the distribution system. (Stock turn, also known as inventory turnover, measures how many times an organisation has sold and replaced inventory during a given period and is discussed further in Chapter 3.)
2.3.2 Historical or Forecasted Demand?
In both of the papers discussed above, historical demand was employed. However, it has been argued that forecasted demand is more relevant for the stocking decision (Boylan 2018). It is the demand that is anticipated over the future that should determine an item's viability. The decision rules do not change their form as a consequence of this different perspective. All that changes is that forecasted mean demand (or number of movements) is used instead of the historical mean demand (or number of movements). The focus on the mean value is natural as the rules are based on the expected (mean) costs associated with stocking or not stocking an item.
The problem of whether to stock becomes particularly important when either products or spare parts reach the end of their life cycle, become obsolete, and are not being requested often or, eventually, at all. In Chapter 12, we return to this issue and discuss, in more detail, forecasting methods that have been proposed to estimate mean demand whilst allowing for explicit linkages to be made between the forecasting task and inventory obsolescence. More common methods for intermittent demand forecasting will be discussed in Chapter 6.
2.3.3 Summary
Before setting stock levels for intermittent demand items, a decision should be taken as to whether an item should be stocked at all. In some situations, keeping zero stock is not an option. Otherwise, an evaluation of demand is required to determine whether the item should be stocked. Such decisions are typically based on a forecast of the mean demand (discussed in Chapter 6), requiring no estimates of the variability of demand (discussed in Chapter 7), which may be required when deciding on replenishment quantities.
2.4 Inventory Control Requirements
Assuming that it is cost beneficial to keep replenishing a particular item in stock, the next important decision relates to how much to keep in stock for that item. Stock levels depend on the size of replenishment orders and how often these orders are placed on the supplier(s). Raising an order is not cost free. Therefore, in addition to the costs previously discussed, of holding inventories and the cost of running out of inventories, another cost factor comes into the equation, that of ordering inventories, as shown in Eq. (2.2).
The ordering cost is usually a fixed cost per order, reflecting such things as raising invoices, cost of the personnel working in relevant organisational departments (e.g. purchasing, supplier management), and transportation and logistics costs, depending on whether customers, suppliers, or both assume such expenses. The true ordering costs sometimes depend on the size of the replenishment orders. For example, if logistics and transportation costs are shared between customers and suppliers, then a large order would attract a higher cost than a smaller one. However, these costs are customarily assumed fixed for modelling purposes.
Different stock control policies balance ordering, holding, and backorder costs in different ways, depending on the priorities and constraints set in the system, resulting in different decisions as to how much to stock and how often to replenish. The policies most relevant to managing intermittent demand inventories are discussed in Section 2.5. In this section, we focus on two precursors of the operation of any policy, namely:
1 How often an accurate indication is available of the stock levels for a particular item (which depends on how the stock status is maintained).
2 How often a test for reordering is made, to determine whether an order should be placed or not.
These issues constitute fundamental decisions in inventory management, and are integral to the selection of an appropriate stock rule.
2.4.1 How Should Stock Records be Maintained?
With regard to the first question, there are only two ways of ‘posting’ the stock status records. One is to add receipts and to subtract sales as they occur. In this case, each transaction triggers an immediate updating of the status and, consequently, this type of control is known as ‘transactions reporting’ (Silver et al. 2017) or as a continuous recording system. The second method of updating the stock status records is to do it periodically so that an interval of time elapses between the moments at which the stock level is updated.
Once the stock status records have been updated, the inventory control system can then check the stock status against one or more inventory parameters, so that a decision can be made about when and how much to order. Inventory parameters are essentially control numbers that tell us what actions are required. For example, in certain inventory policies if the stock levels drop at, or below, some minimum critical point, most often called an order point, then a replenishment order will be placed. In this case, the order point is the inventory parameter of interest. We discuss inventory parameters in detail in Section 2.5.
It is important to consider the relationship between continuous recording of transactions and continuous review of inventory. It is certainly true that we cannot have continuous review without continuous recording. However, a continuous recording of each transaction does not necessarily mean that there will be a continuous review of the stock requirements. Porteus (1985, p. 145) commented, ‘What really matters is not how the inventory levels are monitored but the relationship between recognising that an order should be placed, placing
