What Is A Fixed Order Point?

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Managing the supply of stock is notoriously difficult. There are lots of different balls that need to be juggled in the air to keep stock levels at their optimum levels. In addition there are demands made that stock levels must not be too high; but at the same time, stock outs must be avoided at all costs. So exactly what systems should be used to ensure that stock levels are kept at the right level?

Fixed Order Point System:

Any fixed order point system will monitor stock levels on a continuous basis. When the stock levels falls to a certain (fixed) point then an order is generated to replenish stocks.
So if the optimum stock levels is 100 units and the fixed order point is 90 units, then every time the stock levels fall to 90 units, an order is generated to replenish inventory.

Determining The Fixed Order Point

There are two main factors to be deliberated when establishing the fixed order point, namely what levels of stock need to be kept to ensure the smooth and uninterrupted flow within the production process and what is the economic order point i.e. when do orders present the best value for money?

Defining the optimum stock levels is difficult. There will always be fluctuations in demand and there will be a need to minimize stock, but conversely not to let stock levels become dangerously low.

The economic order point is also very difficult to establish because ordering too much of anything will be good value, but this can present difficulties in terms of housing stock until it is needed. Conversely if the orders are very low, then the costs associated with generating and processing the order will result in items costing more.

For example, to take this concept to its most basic, if an order is generated every time one single unit is used and some 10,000 units are used daily, then a business could not survive, because it would have to generate 10,000 orders every day and then process each single order as it is received, perhaps even generating 10,000 goods delivery notes per day and then face the administrative task of processing 10,000 invoices.

Obviously such a process is unfeasible, so the fixed order point has to be established at a point where it is economically viable within the grand scheme of the production process.

Advantages and Disadvantages to The Fixed Order Point System

The fixed order point system has been used for some time and keeps stock levels fairly stable. As a result this ensures that there are no stock outs unless there is a great level of fluctuations in demand.

The fixed order point will also have been set after the economic order quantity has been established, so the fixed order ensures that orders are placed when they are economically viable, so there is less wastage in terms of ordering supplies.

The fixed order point also enables the stock to be monitored and replenished with little human input. The technology assists to monitor stock levels and orders are generated automatically, so there is no risk of someone simply ‘forgetting’ to place an order.

The disadvantages are that demand cannot be known. There will always be fluctuations and there will always be times when the demand will not be able to be met, so the fixed order point cannot be as flexible as may sometimes be required.

The fixed order point also does not take into account the fact that costs will vary as the supply of raw materials fluctuates. This means that the economic viability of orders will change as time goes on, so the fixed order point needs to be re-assessed as time goes on.

What Are The Disadvantages of Vendor Managed Inventory Systems?

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Vendor managed inventory systems have enjoyed something of a good press of late; after all if it is good enough for major companies such as Walmart, in the US then surely it is without parallel and is the inventory system that all companies should use.

However, there are disadvantages to the vendor managed inventory system. The fact is that no inventory system is perfect, there are lots of advantages and disadvantages according to the type of business that is being run.
Vendor managed inventory systems are simple. The supplier monitors how much stock the buyer has, then the supplier decides how much stock to send the customer, when it will be shipped, what type of stock etc.

This can often mean that there are fewer ‘stock outs’ and that the costs of stock are kept low, because the vendor (seller) effectively controls stock levels. So why isn’t it used absolutely everywhere if it is such a good system and relieves the customer of all the hassle of managing stock levels.

Size of the Buying organization and consumption rates

This may sound glib, but it is true. Take retail for example – if you have thousands of shops and significant buying power suppliers may be able to justify the management cost against the potential reward where the customer is considerably smaller suppliers may be less willing to risk the financial cost against the likely payback.

Trust Is Hard To Earn

When everything goes well within the supply chain, there is no problem with vendor managed inventory systems, but to establish a really trusting relationship takes time. Switching over to VMI does require a certain level of trust on behalf of all parties for example
a) Will the supplier deliver as appropriate
b) Will the customer consume as expected
c) Have the right products been selected

Many organizations start small, with only a certain range of products, this builds trust, which means that in the early days of the VMI, rewards maybe smaller but the process is de-risked. allowing VMI time to ‘bed in’ and to work out. Its important that you consider this upfront in order that your implementation doesn’t take overly long!!

Reliant On Technology

Where your VMI is heavily dependent on technology this can attract 2 main disadvantages; cost and reliability.
The technology to implement VMI can be costly for small organizations stock levels are required to be routinely monitored, in order for the supplier to process restock trigger messages.
Then there is the issue of reliability. Most technology is now reliable, but there can be times when it fails and this is when the VMI system will effectively go into meltdown, often as a result of inaccurate stock level data.

Note that VMI doesn’t explicitly demand technology to operate – many organizations deploy VMI through managed stores where suppliers visit to verify and top-up stock levels.

Willing Stakeholders?

VMI requires all the stakeholders involved to be willing to implement the system, but what can happen in practice is that some stakeholders at least, feel that VMI was imposed on them and then they are less likely to work with the system positively. Then if there is a stock out or some other glitch in performance, those alienated stakeholders will feel their reservations were vindicated.

So it is a system that depends on 100% support from stakeholders and this is often incredibly difficult to achieve.

VMI can offer some tremendous benefits but as with any initiative careful planning and consideration is required!

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