Stock Reservation – Srilekha

Storytelling In Business Analysis – Venkatesh P
April 18, 2018

Stock Reservation – Srilekha

Do you have your own warehouse? Then here are a few questions to consider:

  • How do you balance your stock against the demands?
  • Are you meeting the demands effectively?
  • Are your products being sold before it expires?
  • Are you satisfying your Inventory needs?
  • How do you manage the lead time of deliveries?

The effectiveness of handling Inventory depends completely on the planning and forecasting of the inventory needs. The processes vary from business to business, but the goal is to gain profits and customer satisfaction. Let’s understand stock reservation and inventory movements in detail.

Inventory Setup

Configuring Inventory is a series of definitions that involve planning and setting up the Warehouse and its locations as its initial step.

The common elements involved in configuring the Inventory

  • Warehouse Location Names
  • Rack Identification Numbers/Indices
  • Serial/Lot Number Sequencing Setup
  • Bar code/QR Code setup
  • Defining Inventory Push and Pull Rules
  • Products with Code Identifiers
  • Unit of Measures
  • Initial Inventory Balances
  • Minimum and Maximum Stock Level

If these are ready, then your basic inventory setup is done.

Note:The list is generally applicable to a wider range of supply chain management applications. It may have few inclusions and exclusions as well.

Procurement Approach

The procurement approach denotes on what basis the goods are being acquired, where as in a wider concept it is generally classified into two different movement types.

Make-to-Order (MTO) and Make-to-Stock (MTS)

Whether it is manufacturing or wholesale distribution, the product purchases are handled with two classifications. It can be applied generally as product specific or warehouse specific. In the case of Make-to-Order products, a procurement order is raised when there is a confirmed order which means that the respective product quantity is reserved against the orders received. In the case of Make-to-stock, the supplies are made based on availability in the stock location. The stock is filled through defined replenishment values of the respective product.

Rack Management

Rack location definitions are one of the warehousing infrastructure components. The primary locations are further classified into multiple racks which is an advantage in locating products easily and maintaining the goods stored in a well-organized manner.

The Racks are assigned with a unique sequencing that is mapped to the products which is also known as location identification number. To make things even easier, a rack based bar code is assigned to ensure that the goods are picked up from the right location every time.

This can be achieved through any typical bar code scanning handheld device..

Replenishment Strategy

For every stock able product, a safety stock level is maintained and is called reorder level or reorder point. That is, the minimum and maximum level of stock which is to be maintained within the Inventory location specific to the product. This level count is determined by forecasting the stock movements (i.e., fast moving products are generally considered as stock able)

The reordering levels are triggered periodically either at regular intervals or at a specific point of time based on the business needs, to meet future needs. Two steps to be taken are:

  • Set Minimum and Maximum Stock level
  • Set reordering trigger point

Lot assignment/Serialization of the product

To gain control of the supply chain ‘Serialization’ is a key concept. To have accountability of the product, traceability is quite important and that can be achieved through serialization.

The major advantages of having a sequential number assigned are that the inventory gains the upstream and downstream stock movement tracking, the expiry is identified and the product is located very effectively.

Note: Having a Lot/Serial bar code is an added advantage with regard to stock movements and trace ability.

Most of the business processes, irrespective of the product relies on selling the goods based on FIFO. The FIFO method is easily achieved through product serialization.

Stock Reservation

So far we have been focussing on attaining an effective inventory practice to achieve the defined target of the business. Now, let’s see how stock reservation plays a major role. The most important question is ‘what can be reserved?’ and the answer is ‘the available stock quantities’.

‘Reservation means blocking the available stock quantities based on the regular demands which is generally through the reference of a customer order.’

The biggest challenge of an inventory that holds a wide range of products is meeting the demands on time. In such cases, it is difficult to review and forecast the quantities for the demands and retain the inventory level and accuracy.

Stock Availability and Forecasting

In general, the physical inventory that is available in its location within the Inventory is considered as the available quantity. But actually, it's not so. The exact availability of the product can be determined only when the stock is able to meet the demand based on the orders.

For instance, consider Warehouse ABC has 10 pieces of Product A. When there is an order demand for Order A - 6 pieces and Order B - 8 pieces. Now, how much is available? Or which order can be met? It is either one as the whole and other partial, right! But if we treat each order separately addressed by two different persons X and Y, then the stock availability shows us that, both Order A and B can be met at the different places.

Another case with the same example, Order A was obtained earlier whereas Order B is the recent demand. If the person Y takes the quantities available from the stock against the request for Order B, then the Order A will take more time to be dispatched.

So, how do we handle these situations? It’s only by determining the stock availability and the order demands. Below is the calculation on how we can determine the exact quantity that is available against an order.

Stock Availability = On Hand (-) Total Reserved/Allocated quantities

Forecasted Quantity = On Hand (+) Incoming (-) Outgoing

  • On Hand – Available quantities at stock location
  • Incoming – Confirmed Procurement orders
  • Outgoing – Confirmed Order demands
  • Reserved / Allocated – Blocked quantities with reference to the orders
  • In this way, we can meet the demands on time by reducing the lead time at a higher rate. This is just one way but there are different strategies that can be utilized to attain the accuracy based on different stock movement practices.

Stock Reservation - Application

The stock can be reserved against an order based on its demand. To reserve the quantities the virtual stock availability is determined (i.e., through the above mentioned calculation) and used. A supply chain management system, typically allows two different ways to reserve the quantities that is either manual or automatic.

Manual reservation is blocking the quantities against an order even before confirming based on the priority requests. Automatic reservation happens against the order confirmation, which is when confirmed the system triggers the reservation based on stock availability. It follows FIFO allocation in general.

Note: To gain more control and correctness, serialization can be utilized for certainty.

Deliveries based on Reservation

At the time of pick up and dispatch, the products are picked up based on the reservation with a greater accuracy. Now, it’s ready for delivery, but only the quantities reserved against that order are available at the stock location. When the product is dispatched, the reservation is released against the delivered quantities.

To have a steady supply chain management system all you have to do is adopt the most efficient system.

The effectiveness of handling Inventory depends completely on the planning and forecasting of the inventory needs. The processes vary from business to business, but the goal is to gain profits and customer satisfaction. Let’s understand stock reservation and inventory movements in detail.

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