of real‐world cases.) However, this ignores the fact that intermittent demand items have a higher risk of obsolescence. This should be reflected by inventory holding charges that are higher than those imposed on faster‐moving SKUs. Better informed inventory systems do distinguish between non‐intermittent and intermittent SKUs, fixing the inventory holding charge for the former category and appropriately inflating it for the latter. The necessary degree of inflation depends on the industry and the nature of the products, which determines both the cost and environmental implications of disposing of an obsolete item. In our experience, it would vary between 3% and 5% over and above the inventory holding charge assumed for the faster‐moving SKUs (see, for example, Trimp et al. 2004). The inventory holding charge does not take into account ordering costs, which are often omitted from stock/non‐stock rules. Ordering costs do tend to feature in determining inventory replenishment policies, to be discussed later in this chapter.
The cost of not having an item in stock is typically estimated based on a charge that specifies the penalty cost of running out of stock. Such a charge will be different for cases where sales are lost and those where unsatisfied demand may be backordered (i.e. satisfied as soon as some stock becomes available again). Let us focus on the backorder case here; we return to the differences between lost sales and backordered demand later in the chapter. The backordering charge (
In the first case, the backordering charge is typically set subjectively to reflect costs arising from expediting orders, loss of customers' goodwill, and negative word of mouth publicity. Expediting charges arise by ordering emergency replenishments from suppliers, which come at a (considerably) higher cost than normal replenishments.
The second case is more relevant in a maintenance spare parts context, as each unit short could result, for example, in a machine being idled, with the idle time being equal to the duration of the shortage. So, for the example considered above (with monthly time units and
In both cases, the backordering charge is typically in the range of 5 up to 30 (or even more) times higher than the inventory holding charge, and this reflects the asymmetric costs of under‐stocking and over‐stocking. All else being equal, it always costs more to run out of stock by one unit than to keep in stock one unit that remains unused over a unit time period.
Then, why do we consider the possibility of not stocking an item at all? This is because, over time, it may indeed be more beneficial to allow for a potential (forthcoming) shortage, rather than having to carry an item in stock for a very long time. For example, if
Early work in this area by Tavares and Almeida (1983) proposed a rule, along the lines discussed above, for the stock control of very slow moving spare parts in large production systems, such as ship repair yards and light steel mills. The decision rule was developed in order to decide whether it is economic to have one item in stock or none. In particular, a threshold level of the mean demand was proposed, equal to
For the example offered above,
Johnston et al. (2011) examined the inventory system at Euro Car Parts and demonstrated that, for practical purposes, stock/non‐stock decisions may rely upon the number of movements over a particular time interval. ‘Movements’ are demand incidences that lead to an issue of stock. For unit sized demands, the number of demand incidences is equal to the demand over the same time interval.
The rule offered by Johnston et al. (2011) was derived empirically, following a comprehensive analysis of the stock base of the company. The researchers evaluated the stockout and inventory implications associated with alternative stock/non‐stock cut‐off points and found that a boundary of three movements (over a year) offered the best results: if there are three or more movements per year, then stock this item; else, do not keep it in stock. The implementation of the new rule at Euro Car Parts resulted in a 29% improvement in stock turn, at a time when no other major changes were made to the distribution system. (Stock turn, also known as inventory turnover, measures how many times an organisation has sold and replaced inventory during a given period and is discussed further in Chapter 3.)
2.3.2 Historical or Forecasted Demand?
In both of the papers discussed above, historical demand was employed. However, it has been argued that forecasted demand is more relevant for the stocking decision (Boylan 2018). It is the demand that is anticipated over the future that should determine an item's viability. The decision rules do not change their form as a consequence of this different perspective. All that changes is that forecasted mean demand (or number of movements) is used instead of the historical mean demand (or number of movements). The focus on the mean value is natural as the rules are based on the expected (mean) costs associated with stocking or not stocking an item.
The problem of whether to stock becomes particularly important when either products or spare parts reach the end of their life cycle, become obsolete, and are not being requested often or, eventually, at all. In Chapter 12, we return to this issue and discuss, in more detail, forecasting methods that have been proposed to estimate mean demand whilst allowing for explicit linkages to be made between the forecasting task and inventory obsolescence. More common methods for intermittent