Current inventory management process and policy selections

At the time the study was conducted, there was not any formal inventory manage-ment process available or documanage-mented in the case company. However, unformal process cycle including four interrelated phases that were related to the selection of

the inventory management policies were identified based on the results of the inter-views. This unformal process cycle is presented in the figure 20 where the first phase is related to the selection of the stocking policy, the second phase is related to the selection of the replenishment policy, and the third phase is related to the upkeep of the selected policy. The fourth phase in turn is related to the review of the inventory management policy that triggers the process cycle from the beginning.

Figure 20. Current inventory management process and policy selections.

The process begins by making the stocking decision which is made when new item is opened to the SAP ERP system or policy of existing item is reviewed. The stock-ing decision is based on predefined stockstock-ing criteria and person who is responsible to make the decision is the product manager of the item. Some of the predefined criteria that is reviewed during the stocking policy selection are device and process criticality, stocking agreements, specificity, aging, weight and annual consumption estimate of the item. Based on the previous mentioned criteria, the product manager defines the stocking policy of item either to be stocked item or non-stocked item.

After the stocking policy of the item is decided, the buyer selects the replenishment policy for the item based on the buyer’s own judgmental decision criteria. Some of the criteria which is reviewed before the replenishment policy selection are pur-chase value, delivery time, annual consumption estimate, aging and weight of the

Product manager: items and target levels of the

GIM system Product manager and buyer:

4. Review of the inventory management policy

item. At the moment, there are three different replenishment policies that are used in the case company. The first one is the forecast based planning policy where the replenishments are based on the monthly forecasts and fixed order quantities of the items. The second one is the reorder point, order quantity (s, Q) policy where the replenishments are based on the reorder point levels and fixed order quantities of the items, and the third one is the lot-for-lot policy where the replenishments are based on the exact customer orders and it is used only for the non-stocked delivery time items. Based on the stocking policy of the item, the buyer makes judgmental decision and chooses between the previous mentioned replenishment policies.

After the replenishment policy selection, the replenishment parameters such as monthly forecast, safety stock, reorder point level and fixed order quantity are dy-namically calculated for the forecast based planning and reorder point, order quan-tity (s, Q) policy items by the GIM system. The dynamic calculation of the previous mentioned replenishment parameters is based on the consumption history of the items, and service level and order frequency targets of the GIM system. In the GIM system, the service level targets are aligned and selected for the items by using the inventory policy matrix of the GIM system where the items are classified into dif-ferent item classes based on the classification characteristics of the inventory policy matrix. The characteristics and dimensions that are used in the inventory policy matrix are the pick frequency, sales frequency and value of annual usage (VAU) of the item. Based on the classification of the item, different service level targets are used to calculate the safety stock and reorder point levels for the items. The order frequency targets in turn are aligned and selected for the items based on the VAU classification of the items in the GIM system. This order frequency target is then used with the estimate of annual demand to calculate the fixed order quantity for the item that is further used to determine the order quantity in the SAP ERP system.

The fourth step in the inventory management process is the review of the inventory management policy in order to review the validity of selected stocking and replen-ishment policies. At the moment, there is no systematic procedure to maintain and update the inventory management policy of the items in the case company. Hence,

the inventory management policy reviews have been mainly reactive reviews which have been handled case by case when the need has arisen, and thus, there has not been regular interval between the reviews. In addition, as there is no systematic procedure available to select the replenishment policies at the moment, the need to update the inventory management policy of the item has based solely on the buyers' own judgmental decision criteria. However, if the inventory management policy of the item needs to be updated then the process cycle is started from the beginning.

Based on the findings of the current inventory management process and policy se-lections, the identification of push and pull replenishment items and the lot size alignment with supply capability and demand of the items can be improved by de-veloping following three points of the current inventory management process.

The first point that needs to be improved is the replenishment policy selection. At the moment, the identification of the push and pull replenishment items is problem-atic as there is no systemproblem-atic procedure available for selecting the replenishment policies for the items and the decisions has solely based on the buyers’ own judg-mental decision criteria. This in turn can lead to a situation where the supply chain characteristics of the item might not be suitable for the selected replenishment pol-icy and it can result in sub optimization of the items and inventory. Thus, better results could be achieved by utilizing the same replenishment policy for the group of items with the same supply chain characteristics. Hence, a systematic procedure should be developed for the replenishment policy selection by designing a replen-ishment policy matrix for the stock transport items that is based on the item classi-fication in order to identify and group items with the same supply chain character-istics. After this, the most suitable replenishment policies can be aligned for these item groups in order to ease the selection of the replenishment policy for the items.

The second point that needs to be improved is the order frequencies of the items in order to improve the lot size alignment with supply capability and demand of the items. At the moment, the alignment of the order frequencies is problematic as all of the case company’s items are managed in the same item pool in the GIM system,

and the GIM system does not take into account the different aspects of the supply chain in the alignment of the order frequencies. As the fundamental purpose of the inventory management is to find balance between the supply and demand, the char-acteristics that are used to align the replenishment policies and order frequencies for the items should be related to the upstream and downstream of the supply chain.

In the inventory policy matrix of the GIM system, the characteristics are only re-lated to the downstream of the supply chain and the VAU is the only characteristic that is used to align the order frequencies and thus the lot sizes for the items. This in turn leads to the situation where the lot sizes are not align with the supply capa-bility of the items as the upstream characteristics of the supply chain has not been taken into account at all. Hence, the current dimensions of the inventory policy ma-trix are not suitable to align order frequencies or replenishment policies for the stock transport items as the dimensions that are now used (VAU, pick frequency and sales frequency) are more suitable to define the stocking or production strategy, and the picking and warehousing location for the items. Thus, the new replenishment policy matrix of the stock transport items should include dimensions that are related to the upstream and downstream characteristics of the supply chain in order to better align the supply of the items with the demand of the items. In addition, these dimensions should also support the identification of the items that could be replenished without inspections in order to use the automated processing of orders for these items.

The third point that needs to be improved is the review of the inventory manage-ment policies of the items in order to ensure that up to date replenishmanage-ment policies and lot size parameters are always used for the items. At the moment, the inventory management policy reviews have been mostly reactive and the need to update the inventory management policy of the item has been hard to recognize, as there has not been any formal procedure for the reviews or selecting the replenishment poli-cies. Hence, the review of the inventory management policy of the items can be improved by developing the new replenishment policy matrix for the stock transport items in order to ease the selection of the replenishment policy, and designing a systematic procedure for the reviews with regular intervals in order to change the reactive inventory management towards more proactive inventory management.