Optional Replenishment Systems
An optional replenishment system is a type of inventory control system which combines the characteristics of periodic and fixed quantity inventory systems. It is used when the costs involved in checking and reviewing the inventory are high, the review could be inaccurate or problematic (for instance, this can be the case with dangerous chemicals, scrap materials, pig iron, etc.), or when ordering of the new materials is costly and/or difficult. If the optional replenishment system is used, it means that a certain amount of the stock (for instance, s) is defined as low, whereas another certain amount of it (say, S) is defined as desirable. The firm carries out a periodic review of the availability of stock in the warehouse. The quantity of stock is then compared with s and S. If the quantity present is below s, then the additional stock is ordered. Otherwise, no orders are made (Chen, Feng, and Ou 404-405; Gopalakrishnan and Haleem 163).
There exist a number of easy ways to effectively use this system. For example, it is possible to keep the amount of stock equal to s in a separate compartment, and when the main stock is used up, to immediately make an order. Precautions should be taken, however, in order to avoid obsolescence (Gopalakrishnan and Haleem 163).
An example can be given to illustrate this system. For instance, a firm uses scrap metal for its manufacturing purposes. It is not easy to estimate exactly how much metal can be obtained from e.g., a ton of scrap metal; therefore, the optional replenishment system is used. Let s = 10 tons, S = 100 tons. If the firm reviews its inventory and finds that its warehouses contain approximately 27 tons of scrap metal, then 27>s, and no steps are taken. If, on the other hand, it is discovered that only 6 tons of scrap metal are left, then 6<s, and the company orders 94 tons of scrap metal, because of S=6+94 in this case.
Base Stock Systems
If a company operates in a number of locations, it might experience additional difficulties with the availability of materials in central storage. This is due to the fact that small changes in demand from the end receivers of materials can cause major changes in the central warehouse.
In order to avoid some complications related to the control of multilocation systems, such a system of control as the base stock system was developed. According to the base stock system, it is necessary to satisfy the following conditions: (1) the data on demand coming from the end receivers of materials should be available to each of the decision-makers located at the stock points; (2) the replenishment of the stock points occurs not when there is a stock withdrawal, but when there is a certain level of end-item demand; besides, stock replenishment and demand are considered separately; (3) the base stock that should be kept at a location is calculated as a function of the stock at that location added to stock at all the subsequent locations (Lödding 285-288).
Let us consider a simple example of the use of the base stock system. For instance, a central warehouse supplies a number of ramified networks (let us call them trees) of smaller warehouses with stock. Suddenly, the demand in most of the warehouses at the ends of the trees increases, but insignificantly. However, they use up all their stock, which eventually leads to the deficit of the stock in the central warehouse, for such a great increase in the total demand was not expected. In order to avoid such a situation in the future, the base stock system is implemented. Now, the central warehouse and all the intermediary warehouses are informed of the changes in demand at the final points immediately. Next time, when the demand changes, the intermediary warehouses and the central one react to this change at once, and each of them orders new stock to create a bigger reserve before it is drained by the subsequent warehouses.
Works Cited
Chen, Frank Y., Youyi Feng, and Jihong Ou. “Management of Inventory Replenishment and Available Offerings for Goods Sold With Optional Value-Added Packages.” IIE Transactions 37.5 (2005): 397-406. Business Source Complete. Web.
Gopalakrishnan, P., and Abid Haleem. Handbook of Materials Management. 2nd ed. 2015. Delhi, India: PHI Learning Private Limited. Google Books. Web.
Lödding, Hermann. Handbook of Manufacturing Control: Fundamentals, Description, Configuration. New York, NY: Springer Science & Business Media, 2013. Google Books. Web.