Develop, Finalize, and Implement Inventory Control
Inventory is used to ensure the availability of materials required in successive
stages of the supply chain. However, inventory represents an invested cost
that adds no direct value to the product being produced and therefore can be
a significant contributor to the total cost of ownership (TCO). While inventory
is sometimes necessary to smooth the step between sources and use, it
should be minimized wherever it will reduce the TCO. This risk should be
managed through speed and flexibility, not quantity. Caution should be
exercised by the Purchase/SCM Team to avoid simply pushing inventory
responsibilities back to the Supplier because this may in fact increase the
overall costs and risks.
Where inventory is appropriate (e.g., Supplier or Postal Service centralized,
regional, Districts, or stockrooms), an inventory control plan aids in managing
inventory (material on hand to support requirements), so the range (number
of items) and depth (quantities) of inventories are kept to a minimum level
necessary for effective Client support. Again, the focus needs to be on speed
and flexibility, not quantity.
The development, finalization, and implementation of the inventory control
plan informs decisions on:
• Stocking - what and how much
• Stock replenishment - when and how much to order
• Disposal of excess stock
• Inventory control standards
Cost-effective and feasible arrangements that place the risks and related
expenses of inventory on non-Postal sources of supply, including direct
delivery contracts or just-in-time (JIT) purchasing, should always be
considered. JIT is a management philosophy that strives to eliminate sources
of manufacturing costs by having the right part in the right place at the right
time. Where direct delivery or JIT approaches are used by the
Purchase/SCM Team, the Team must work with the Supplier to optimize the
Supplier's inventory costs.
The following elements can be applied to every level of inventory:
• Develop inventory control plan
• Ascertain stocking decision factors
• Classify demand-based and non-demand-based items
• Stock positioning
• Reparable management
• Stockroom management
Development of the inventory control plan includes the following activities:
• Ascertain stocking decision factors
• Classify demand-based and non-demand-based items
• Systems for the reorder process
• Create steps for conducting replenishment
• Establish steps for asset tracking and reporting
• Choose possible methods for investment recovery
• Form inventory control standards
Questions that aid in determining factors surrounding stocking decisions are:
• How critical is the material to Postal operations (e.g., will the lack
of the material delay processing or cause a loss of revenue)?
• What are the supply and demand patterns (e.g., is there enough
demand to stock the item; can inventory be built up in anticipation
of future demand)?
• Is the item expensive or fragile, does it have a short shelf life, or
is it otherwise particularly prone to loss (stocking is costly in these
• Do market sources dictate the amount of inventory stocked (e.g.,
an oversupply of items may need to be stocked when suppliers
no longer carry items that are needed to support operations or for
commodities traded on a worldwide market or when inventory can
be purchased to hedge against expected higher prices)?
• Do quantity discounts; reduction in shipping, clerical, or setup
costs; and other possible cost savings or benefits of carrying
quantities greater than needed outweigh increased inventory
costs (e.g., item, carrying, ordering, stock-out, and
• How long will it take to get the material (a short lead time often
means that stocking can be minimized or even eliminated)?
• Is storage space available to handle the material (Postal or
The items can also be classified as "demand-based" or "non-demand-based."
Demand-based items are stocked at the local level because they have
demonstrated sufficient past demand history to warrant stocking under
specified Postal Service demand frequency thresholds. At the wholesale level
(centralized storage/distribution), high demand makes an item a good
candidate for direct supplier delivery or JIT distribution. The economics of
large quantity over time makes it feasible for the Supplier to produce on a
stable plan and to make regular shipments. The result stabilizes the Supplier
resource needs and cash flows. Requisitioning or demand frequency
provides information on the continued stocking of an item. If a stocked item
does not have the appropriate frequency, it becomes a candidate to be
dropped from inventory.
Non-demand-based items are items stocked because of their importance to
the Client or because the items have been proven to be less costly to stock
than not to stock. There are two types of non-demand-based items:
insurance and critical. Insurance items are a component, a subassembly, or
assembly that has a very low mortality rate, is infrequently used, and is
stocked as insurance against a lengthy lead time or pipeline delay. Critical
items are items that, if not available when needed, will impact the ability of
the installation to perform its mission; they can also be items on hand for
personnel health and safety. The installation determines which items are
critical. The items must be cataloged (identified and classified as
"non-demand") so more management attention can be given to them.
Provisioning is the process of determining how the materials required by
Postal Service activities should be provided. It includes characterizing the
items (e.g., as capital, expense, sensitive, reparable, hazardous, and even
centrally or locally acquired). Provisioning looks at the criticality of the item to
the process being supported, the anticipated failure rates and resultant
demand patterns, and the lead time to reacquire. The models and processes
for this analysis are done by SM Operations in cooperation with Maintenance
Policies and Procedures. The result is a listing of items and quantities that
• Centrally purchased and distributed to each level of Postal
Service storage or
• Identified for repair (internal or commercial) vs. new purchase or
• Coded for local purchase as required
Stock positioning uses the information gathered for the provisioning process
and applies it to where material should be optimally placed to meet activity
requirements. It considers criticality, maintainability factors, and the cycle
times to get the material from storage points to the use location. Key to this
analysis is that speed of delivery can offset the need for larger quantities of
inventory, but this needs to be based on the potential effect each alternative
has on the TCO (e.g., we can reduce the quantity of local inventory, but if that
increases the user downtime and costs or results in a revenue loss, then this
decision is not the best TCO for this supply chain situation).
Reparables are a category of parts with characteristics that show the item to
be cheaper to repair rather than buy new. These may be distinct items, such
as a 50-horsepower motor or a module with replaceable components. There
following are questions that should be addressed when dealing with
• Can the most common faults be repaired more economically than
replacing the whole unit?
• At what level should the repairs be done (e.g., on equipment; off
equipment, but on-site; or off-site)?
• Who should do the repairs? (This is obviously related to the
"where" decision, but also extends to whether it should be
repaired via the (prime) Supplier, the original equipment
manufacturer (OEM), or a third-party provider.)
• What processes should be followed to supply the reparable, get
the return (a form of reverse logistics), and get it repaired and
returned to ready-for-issue status?
Postal Service storage and stockroom space management is a complicated
undertaking, involving a variety of skills and disciplines, because each
storage operation must be carefully planned and designed. Stockrooms must
provide services and controls that are most effective and efficient for the task
at hand and for the Postal Service as a whole. Sophisticated techniques are
used to design and organize storage areas, and equally sophisticated locator
systems are used to permit quick and accurate identification of material
whereabouts. Storage space management serves the purpose of constantly
monitoring, reporting, and controlling storage space that represents a
significant Postal Service investment.
• Stockroom - any formal location where the Postal Service stores
and issues materials.
• Storage Space - the physical area where supplies, equipment,
products, and parts are placed prior to issuance to the user. This
space includes areas for administrative support of receipt,
storage, and issuing functions or can be located in another space,
room, or even facility.
• Management - the supervision and maintenance of stockroom
and storage space areas.
A variety of tools and processes are used within the Postal Service for the
organization and management of stockrooms and storage space: for
example, Material Distribution/Inventory Control System (MDIMS), electronic
Maintenance Activity Reporting System (eMARS), Vendor-Managed
Inventory (VMI), and vendor consignment inventories (VCI). The Item
Manager should be consulted for guidance and assistance in setting up these
facilities. The Item Manager and the Purchase/SCM Team should refer to the
• Handbook AS-701, Material Management
• Handbook F-1, Post Office Accounting Procedures
• Handbook MS-63, Maintenance Operations Support
• Handbook PO-701, Fleet Management
Any cost-effective and feasible alternatives to stocking items should always
be considered. This includes systems contracts, just-in-time purchasing, or
other arrangements that place the risks and related expenses of inventory on
non-Postal sources of supply.
Demand-based items are stocked because they have demonstrated sufficient
past demand history to warrant stocking under specified demand frequency
thresholds. Non-demand-based items are items stocked because of the
items' importance to the Client or because the items have been proven to be
less costly to stock than not to stock. Stocking decisions are addressed in
greater detail in the Develop, Finalize, and Implement Inventory Control Plan
topic of the Manage Demand task of Process Step 5: Measure and Manage
Not all items are stored in the main stockroom. Sometimes it is more
advantageous for items to be stored in other locations. The decision on
where to place items is called "positioning." Locations to store material
• Centralized locations - national or regional storage areas
positioned to provide timely, but cost-effective services to
• Plant or facility locations - stockrooms and storage space in
direct support of a specific site.
• Remote locations - located away from the main stockroom.
• Satellite locations - consist of predetermined quantities of parts
and supplies located in Postal Service installations for distribution
to a repair activity away from the main stockroom. These can be
fixed locations or mobile stock locations.
The Postal Service uses a variety of systems to determine the asset
quantities at which a replenishment action is placed. Although some of these
systems utilize complex forecasting tools and techniques, at its simplest
level, stock is replenished using a reorder point (ROP) process also known
as the "perpetual inventory system." The computer system in use tracks
on-hand and on-order real assets. This figure is compared with a calculated
asset balance at which the combined ordering, fulfillment, and shipment
times would indicate an order should be placed. When assets are at or below
a certain ROP, a quantity is reordered to replenish the stock, based on
authorized stock levels. In theory, when assets are at the ROP, the stockroom
holds just enough stock to cover predicted usage while the order is being
processed and shipped, plus emergency stocks.
A quadrant approach (see Figure 5.5) classifies Postal Service purchases
into four categories, depending on their impact on the Postal Service core
competencies (noncore versus core) and complexities (standard versus
custom). Depending on the quadrant, the stocking decisions, replenishment,
and disposal of inventory will be structured differently.
These items contribute significant supporting capability to the Postal Service
and are considered specialized. The stocking decisions should take into
account that specifications for requirements change, which may cause the
current stock to be oversupplied and have to be removed. Care should be
taken not to overstock items.
These items create direct value for the end Client; examples include
specialized software and critical raw materials. In these cases, items should
be readily stocked so they can be accessed quickly because they are
pertinent to Postal Service operations. Stocking decisions should reflect the
continual search for innovation in form and usage to provide a consistent
stream of new opportunities to build a competitive advantage.
These items are essential to support the business infrastructure, but do not
relate or provide value to the end Client. The Supplier frequently manages
the complete supply chain process, in addition to supplying the product or
These items create value for the end Client, but do not need to be
customized exclusively by the Postal Service. Just-in-time (JIT) purchasing is
an option in Quadrant IV.
Develop Preliminary Investment Recovery Plan topic, Develop Sourcing
Strategy task, Process Step 2: Evaluate Sources
Finalize Investment Recovery Plan topic, Plan for Contract Administration
task, Process Step 3: Select Suppliers
Implement Investment Recovery Plan topic, Manage Demand task, Process
Step 5: Measure and Manage Supply
Investment Recovery task, Process Step 6: End of Life