When are Forecasts Required for Stocking Decisions?
So far, we have seen that the nature of a stock control system (periodic or continuous) affects the time interval over which a forecast is required. The second question we posed in the beginning of this section (and which has already been partly addressed), is: ‘How often should the test for reordering be made?’ Considering that question further reveals the difference between periodic and continuous review systems and the times when forecasts are needed for stocking decisions.
Before we address this question, it is essential to introduce the concept of inventory position. The inventory position is defined as the actual stock on hand (i.e. what we physically have in stock) for a particular SKU, plus any orders for that SKU pending to arrive, minus any demand that has not yet been satisfied and is to be satisfied as soon as some stock becomes available. This is expressed in Eq. (2.3).
In continuous review systems, inventory parameters are not recalculated until the inventory position has fallen below a critical point or reached that critical point. This is known as the ‘order point’ but is also called a base stock or a minimum (Brown 1959). In this type of system, orders can be triggered only by a demand because the inventory position will not decline otherwise. (Exceptions may arise if the stock on hand (SOH) or backorders (BO) are found to be incorrectly recorded, or some of the stock on order (SOO) has been cancelled.) The triggering of an order is immediate with continuous review. Therefore, the issuing of stock, if available, at ‘issue points’, is generated immediately after demand has occurred.
Continuous systems require, as far as stock replenishment is concerned, forecasts at issue points only. Even if forecasts are automatically generated at other times, they are not relevant to ordering decisions; it is only those made immediately after a demand occurrence that affect orders. The decision may be to order nothing if demand has not been sufficiently large to deplete the inventory position to a level at, or below, the order point.
We have already noted that a continuous recording of each transaction, leading to inventory records that are ‘live’ continuously, does not necessarily mean a continuous review of the stock requirements. Indeed, such reviews take place most commonly periodically, at the end of fixed time intervals. Let us suppose that the stock requirements are reviewed at the end of every day, and that daily demand data are used for the calculation of forecasts. If an item were demanded at 13:00 during the day, reducing the inventory position to below the order point, then in a strict continuous system, an order would be automatically generated immediately after 13:00. However, if stock requirements are not reviewed until close of business, then the order would be generated at the end of the day. From a stock replenishment perspective, this is not continuous review. It is, in fact, a periodic system, to which we now turn.
In periodic review systems, the simplest case is when stock is reviewed at the end of every period (
Generally, then, the inventory position will not reduce and the required inventory level will not increase after zero demand, meaning that an order will be triggered only if there has been some demand. Hence, it is only those forecasts that are made immediately after the end of a period with a demand occurrence which may generate an issue point and initiate an issuing of stock.
Now suppose that stock is reviewed at the end of every second period (
Stocking/non‐stocking reviews are not generally undertaken on an individual item basis; more commonly, the stock range is reviewed collectively. This is done periodically, usually less frequently than the standard stock replenishment reviews, and not always at regular intervals. As discussed earlier, forecasts of mean demand are required whenever such reviews are conducted. At the level of the individual SKU, this may be at any point in time: it may or may not coincide with the previous periods having had some demand. No conditioning on previous periods experiencing demand is needed in this case. So, it does not matter whether stock/non‐stock reviews are conducted at the end of every period, or at regular or irregular intervals, or whether it is done collectively or individually. As long as reviews are not triggered by demand occurrences, forecasts may be needed at any point in time for an individual SKU, to inform decisions regarding cessation of replenishment (‘non‐stock’).
From a practical perspective, we will wish to use the same forecasting methods irrespective of the length of review interval and regardless of whether the forecast is used to decide how much stock to replenish or whether to continue stocking the item. Therefore, a forecasting method should provide good results when evaluated only after issue points (generated by review intervals containing some demand) or at any point in time. As we shall see in Chapter 6, this consideration is important in the evaluation of forecasting methods for intermittent demand.
Returning to the question of the frequency of testing for reordering, the ideal system from an inventory holding perspective is the continuous system with immediate reordering. However, this is not always desirable from a supplier perspective, and so a periodic system with reviews at the end of every period may be more realistic, and will probably incur a relatively small additional inventory cost when compared to the ideal system. Longer reviews may be suggested for some items, but an evaluation of the inventory costs should be performed before extending review intervals. Naturally, it is desirable that forecasting methods can perform well, whatever the length of review interval.
2.4.3 Summary
The fundamental purpose of any inventory control system is to provide answers to the following four questions (Brown 1967):
1 How should the stock status records be maintained?
2 How often should the test for reordering be made?
3 When should a replenishment order be placed?
4 How
