Review of inventory policy parameters

As the months of 2020 go by, the population has been adapting to the decrease in quarantine and the relaxation of social isolation measures, while many companies report that “the worst is over” and are coming trying to adapt to the “New Reality”. Among the various measures that companies will need to implement to resume their activities, we highlight the revision of parameters for the rebalancing of inventories.

Figure: Review of inventory policies needs to be done regularly, especially when facing a new reality. Source: Tiger Lily from Pexels

The review of parameters that define stock policies and their sizes needs to be done on a regular basis in companies. Understanding how changes affect such parameters and recalculating the inventory policy is a common activity for the operations areas. With the coronavirus crisis, many parameters need to be revised, among which we have:

1) Service Level: Will companies that offered service levels of 99% be able to maintain these rates? In many cases, the level of service dropped during the pandemic, due to the uncertainties brought about by the crisis, but in the post-pandemic, which service will be offered? It is necessary to understand if the values ​​used before will be maintained or if there will be a new proposal for the level of service offered.

2) Expected demand: Expected demand has changed a lot throughout 2020, understanding what the new demand level will be after the crisis will be key to calculating ideal stock levels. We can cite two examples: hand sanitizer, which had a peak in demand, should show a higher demand level than the previous one, since there will be a change in people's behavior in relation to hand hygiene for a long period. Another example would be toilet paper, which also experienced a sudden increase in demand right at the beginning of the quarantine, but with a consumption pattern that has not changed, therefore, the expected level of demand must be the same as in the period prior to the quarantine. O post related to adjustments in historical series treats more of this subject;

3) Variation in Demand: The uncertainties brought about by the health crisis generate greater variation in demand, which generates a greater need for stocks to overcome uncertainties;

4) Expected Lead Time: The average time to receive products may have increased due to problems and interruptions in supply, which leads to the need to increase inventories, or the company may have redefined the modes of transport, which also change the parameter;

5) Variation in Lead Time: uncertainties also affect expected delivery times, which also leads to a greater need for stocks.

In addition to these parameters, others that we can cite as fundamental for reviewing inventory policies are order frequency, batch sizes, capacities, minimum and maximum inventories, among others. Furthermore, we must redefine the opportunity cost used to calculate the financial cost of inventory, since the reduction in the Selic rate contributes to the “cheaperness” of financial costs and can justify, for example, an increase in inventory levels. Finally, it will be essential to reevaluate the frequency with which all these parameters are revised, so that more frequent revisions may be necessary in the future.

The review of parameters is just one of the 18 practical actions that will be analyzed in the live of Post-Crisis Inventory Rebalancing, which ILOS will promote this Thursday, July 23rd at 16 pm. It will be an unmissable opportunity to understand the impacts and plan the necessary actions for the New Reality.