Optimization

Inventory optimization occurs when you fine tune the amount of available inventory according to the orders you expect to receive. The concept of “lead + processing time” helps you to optimize inventory.

Consider an item with 20 units available in the warehouse ready for shipping. Suppose an order arrives to ship 20 units of that item 12 days from now.

Suppose a different customer asks if you can accept an order for 10 units to ship six days from now. Should you accept this order? In other words, do you have 10 units available to promise (ATP) six days from now?

Addressing this question requires the following scheduling parameters:

• Lead time – The time required to obtain the item from your suppliers or manufacturers if you were to place a new purchase order today.
• Inbound processing time – The time required to process a supply after it has arrived in your node.
• Outbound processing time – The time required for your node to assemble an item, perform any value-added services, and physically ship the item.

The sum of these three parameters for an item is known as lead + processing time. Within the lead + processing time, you can expect to submit a purchase order to your supplier, receive the supply into your node, process the item, and ship it out. Therefore, demands with expected fulfillment dates beyond the lead + processing time can be fulfilled irrespective of your current inventory situation.

To return to the example, you can accept the order for 10 units if the lead + processing time allows you to fill both the order for 10 units six days from now and the order for 20 units 12 days from now.