Our customers are great teachers who have always helped us bridge the gap between textbook theory and practical application of forecasting and demand planning. Our latest bit of schooling concerns \u201cblanket orders\u201d and how to account for them as part of the demand planning process.\u00a0<\/p>\n
Expanding the Inventory Theory Textbook<\/strong><\/p>\n Textbook inventory theory focuses on the three most used replenishment policies: (1) Periodic review order-up-to policy, designated (T, S) in the books (2) Continuous review policy with fixed order quantity, designated (R, Q) and (3) Continuous review order-up-to policy, designated (s, S) but usually called \u201cMin\/Max.\u201d Our customers have pointed out that their actual ordering process often includes frequent use of \u201cblanket orders.\u201d This blog focuses on how to incorporate blanket orders into the demand planning process and details how to adjust stocking targets accordingly.<\/p>\n Demand Planning with Blanket Orders is Different<\/strong><\/p>\n Blanket orders are contracts with suppliers for fixed replenishment quantities arriving at fixed intervals. For example, you might agree with your supplier to receive 20 units every 7 days via a blanket order rather than 60 to 90 units every 28 days under the Periodic Review policy. Blanket orders contrast even more with the Continuous Review policies, under which both order schedules and order quantities are random.\u00a0 In general, it is efficient to build flexibility into the restocking process so that you order only what you need and only order when you need it. By that standard, Min\/Max should make the most sense and blanket policies should make the least sense.<\/p>\n The Case for Blanket Policies<\/strong><\/p>\n However, while efficiency is important, it is never the only consideration. One of our customers, let\u2019s call them Company X, explained the appeal of blanket policies in their circumstances. Company X makes high-performance parts for motorcycles and ATV\u2019s. They turn raw steel into cool things.\u00a0 But they must deal with the steel. Steel is expensive. Steel is bulky and heavy. Steel is not something conjured overnight on a special-order basis. The inventory manager at Company X does not want to place large but random-sized orders at random times. He does not want to baby-sit a mountain of steel. His suppliers do not want to receive orders for random quantities at random times. And Company X prefers to spread out its payments. The result: Blanket orders.<\/p>\n The Fatal Flaw in Blanket Policies<\/strong><\/p>\n For Company X, blanket orders are intended to even out replenishment buys and avoid unwieldy buildups of piles of steel before they are ready for use. But the logic behind continuous review inventory policies still applies. Surges in demand, otherwise welcome, will occur and can create stockouts. Likewise, pauses in demand can create excess demand. As time goes on, it becomes clear that a blanket policy has a fatal flaw: only if the blanket orders exactly match the average demand can they avoid runaway inventory in either direction, up or down. In practice, it will be impossible to exactly match average demand. Furthermore, average demand is a moving target and can drift up or down.<\/p>\n
![\"\"](\"https:\/\/smartcorp.com\/wp-content\/uploads\/2016\/04\/optim_bottom.png\")
<\/a><\/p>\n