Having a defined inventory policy provides the guidelines for inventory managers to make supply decisions that ensure inventory levels are maintained within acceptable parameters to support Customer Service, Operational Efficiency and Financial targets. It also provides a reporting metric for senior management to understand variances.

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An inventory policy is defined at SKU level providing acceptable minimum and maximum volumes and has a direct influence on space and financial projections.

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The basis of the minimum level, referred to as Safety Stock, is statistically calculated by reviewing, demand variance over a defined horizon, supply lead time, and required service factor, with further input from both the commercial and operational teams to identify if the SKU has strategic importance to the range and/or if it has supply challenges and therefore requires additional levels of safety.

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Supply volume, referred to as Cycle Stock, is added to the Safety Stock to define the maximum inventory level. Cycle Stock for purchase items is typically aligned to supplier MOQ (Minimum Order Quantity) or EOQ (Economic Order Quantity) dependent on procurement policy, or production batch quantities for manufactured items.

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In addition to identifying minimum and maximum inventory volumes typically an ABC policy is applied based on rate of sale and is equally used to identify the service factor required.

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The calculation and process to define Safety Stock delivers a volume by SKU, which is a key replenishment parameter of MRP (Material Requirement Planning) functionality, however this can be converted into a cover period i.e. 10k volume = average 4wks cover which is beneficial when capacity balancing and stock building to support peak demand periods.

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Defining the Inventory Policy based on cover periods provides for inventory levels be increased during peak demand periods and reduced during low periods however this will be dependent on supply profiles i.e. seasonality of material supply or stability of manufacturing.