Inventory Theory

What it covers

The order follows a real buying cycle: first what is being decided, then with which policy, and at the end how to test that policy before trusting money to it.

1. What inventory decidesStock as a decision, not a balance. What an excess costs against what a shortage costs, and why that ratio drives everything that follows.
2. Lead-time demandThe variable that matters is not this month's demand: it is the total between placing the order and receiving it, with the lead time varying too.
3. Service levelsFill rate and cycle service level are not the same thing and are almost always confused. How to choose the number, which is an economic decision and not a policy.
4. Safety stockFrom the classic formula to the one that comes out of the distribution. What each assumes, and what happens when those assumptions do not hold, which is most of the time.
5. Continuous and periodic reviewWatching stock all the time or every so often. What changes in safety stock when you review once a week, and why the review period adds to the lead time.
6. Replenishment policies(s,Q), (R,S), (s,S), min/max. Which one resembles how your company actually buys, and which parameter of each is the one that ends up being argued over.
7. Lot sizingEOQ and why it is almost never used as is. Supplier minimums, pack multiples, the full truck and volume discounts.
8. SegmentationABC, XYZ and how predictable each series is. One policy per group, because the same rule for the whole catalogue is what fills the warehouse.
9. Intermittent and slow moversThe ones that sell rarely and in bursts. When holding no stock is the right answer, and why the average is the worst guide for this half of the catalogue.
10. Perishables and obsolescenceShelf life, FEFO, markdowns. The cost of excess stops being financial and becomes a write-off, and that changes which quantile is worth covering.
11. Backtesting the policyA policy backtest simulates purchases, stockouts and tied-up capital. It is the only way to compare two policies without paying for the difference.
12. Running itSuggested orders, exceptions and what to look at every week: fill rate, turns, coverage and stockouts. The loop with the supplier and with whoever buys.