How to Best Understand Inventory Planning

Executive Summary

  • Inventory planning differs from supply chain execution.
  • We cover the major aspects of inventory planning.

Inventory Planning


This article will provide an overview as to many topics related to inventory planning, stock planning and inventory and stock inventory.

What is Inventory Planning and Stock Planning and the Stock on Hand?

Inventory planning or stock planning is the analytical process of determining the stocking levels throughout the supply network. This means planning for every product location combination in the supply network. Inventory planning or stock planning can be based on two primary approaches; one is forecast based planning and the second is consumption based planning.

The stock on hand is the stock at each product location combination (if the overall supply network that is being discussed) that the company has in inventory. The stock on hand can also apply to a specific product location combination, such as a particular product material in a specific distribution center.

What is the Difference Between Forecast Based Planning and Consumption Based Planning?

These two major approaches, which contain a large amount of detail below each are the following:

  1. Forecast Based Planning: This is where a forecast is used by the system to drive the ordering logic.
  2. Consumption Based Planning: This is where the consumption of the stock drives the ordering logic.

There is no need for a company to choose exclusively forecast based planning or exclusively consumption based planning as all supply planning applications contain settings for both, and their forecast based planning or consumption based planning can be used for specific product location combinations.

What is an Inventory List, a list of Inventory Items, Product Inventory or an Inventory Database?

The inventory list or the list of inventory items is the product inventory or inventory database that the company maintains. The inventory list or list of inventory items is not specific to a location, so will always be far lower than when locations are brought into the analysis. This is why it is always important to specify whether one means the inventory database or the inventory database per location.

Any inventory list should be reviewed for whether some of the products on the list of inventory items should be removed. This is because the inventory list has a way of proliferating over time due to things like new product introductions.

Replenishment Lead Time, Procurement Lead Time, Manufacturing Lead Time and Shipping Lead Time or Lead Time for Delivery

The various lead times connect in the following way:

For Manufactured Products

Replenishment Lead Time = Manufacturing Lead Time + Procurement Lead Time (for raw materials, components, and subassemblies) + Shipping Lead Time or Lead Time for Delivery

For Procured Products

Replenishment Lead Time = Procurement Lead Time (for raw materials, components, and subassemblies) + Shipping Lead Time or Lead Time for Delivery

There is often discussion of expediting the various lead times, but in many cases, the only lead time that is reasonably capable of being expedited is the shipping lead time or lead time for delivery. The shipping lead time or lead time for delivery can normally only be expedited at a considerable expense (unless the product in question is of high value and low weight)

There are cases where the opposite occurs, where the total fulfilment lead time is shorter than the order lead time. Examples of this include defense contracting and custom suits. While it receives a very high amount of coverage, this is in actuality a very small portion of the overall market that is as made to order. Make to order products tend to be premium priced, and many products that are thought to be made to order (such as configurable computers) are not made to order at all, but in fact, assemble to order.

What is The Role of the Inventory Clerk and the Inventory Manager?

The inventory clerk is the individual how touches the inventory and does things like the physical inventory. Although the term inventory clerk is a bit dated. The inventory manager performs inventory planning and also expediting of things like purchase orders and production orders. While the inventory clerk is entirely execution focused, the inventory manager must often keep inventory stock on hand below a certain cap, while attaining service level targets.

What is an Inventory Planning System?

An inventory planning system can refer to either an approach or to software applications that implements a particular inventory planning system.


The functions of inventory are to have the right amount of stock on hand when demands are received to meet expected service levels expectations. The foundational functions of inventory are to compensate for where the order lead time is shorter than the replenishment lead time.

While inventory planning and stock planning is certainly not a high profile activity, it is of great importance.

Inventory planning and stock planning has been greatly changed through the introduction of both inventory planning or supply planning software and the use of general tools like spreadsheets. These tools allow the inventory manager and others to manage far more inventory more effectively than they did in the past.

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Safety Stock and Service Level Book

Safety Stock

Safety Stock and Service Levels: A New Approach

Important Features About Safety Stock

Safety stock is one of the most commonly discussed topics in supply chain management. Every MRP application and every advanced planning application on the market has either a field for safety stock or can calculate safety stock. However, companies continue to struggle with the right level to set it. Service levels are strongly related to safety stock. However, companies also struggle with how to set service levels.

How Systems Set Safety Stock

The vast majority of systems allow the setting of safety stock by multiple means (static, dynamic, adjustable with the forecast in days’ supply, etc..). However, most systems do not allow the safety stock to be set in a way that is considerate of the inventory that is available to be applied.By reading this book you will:

  • Understand the concepts and formula used for safety stock and service level setting.
  • Common ways of setting safety stock.
  • Service levels and inventory optimization applications.
  • The best real ways of setting both service levels and safety stock.


Chapter 1: Introduction
Chapter 2: Safety Stock and Service Levels from a Conceptual Perspective
Chapter 3: The Common Ways of Setting Safety Stock
Chapter 4: The Common Issues with Safety Stock
Chapter 5: Common Issues with Service Level Setting
Chapter 6: Service Level Agreement
Chapter 7: Safety Stock and Service Levels in Inventory Optimization and Multi-Echelon Software
Chapter 8: A Simpler Approach to Comprehensively Setting Safety Stock and Service Levels

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