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Develop, Finalize, and Implement Inventory Control Plan

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

Develop Inventory Control Plan

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

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Ascertain Stocking Decision Factors

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 instances)?

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 capacity-related costs)?

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 commercial)?

Classify Demand-Based and Non-Demand-Based Items

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.

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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 will be:

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

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).

Reparable Management

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 reparables:

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?

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Stockroom Management

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 following handbooks:

Handbook AS-701, Material Management

Handbook F-1, Post Office Accounting Procedures

Handbook MS-63, Maintenance Operations Support

Handbook PO-701, Fleet Management

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Stocking Decisions

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 Supply.


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 include:

Centralized locations - national or regional storage areas positioned to provide timely, but cost-effective services to supported areas.

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.

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Systems for the Reorder Process

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.

Quadrant Approach

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.

Figure 5.5

Quadrant Approach

Figure 5.5 drawing showing four quadrants

Quadrant I: Custom/Noncore Purchase

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.

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Quadrant II: Custom/Core Purchase

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.

Quadrant III: Standard/Noncore Purchase

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 service.

Quadrant IV: Standard/Core Purchase

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.

Other Topics Considered

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

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