Using Supermarkets to Manage Your Inventory

This technique can help you “right-size” all your supplies.

For years, companies with standard products, or those made on a repetitive basis, have employed supermarkets to manage their inventory. Job shops specializing in customized, limited-run products, however, have not generally done so. One reason for this is that supermarkets are often viewed as a means of managing finished goods, which are not usually stored in job shops. However, supermarkets have proven effective in handling inventory of all types, especially consumables such as raw material, hardware, tooling, spare parts and supplies used in a variety of companies. 

There are four issues that must be addressed when establishing a supermarket: 1) what items to include, 2) when to replenish, 3) how many items to replenish and 4) how to handle higher-than-normal demand. Let’s explore each of these issues in detail.

What items to include in a supermarket. Any item that is consumed on a regular basis is a candidate for inclusion in a supermarket. Items required by manufacturing, maintenance, warehousing, shipping and receiving, technical support, administration, and service can all be effectively managed in this way. Because the supermarket concept depends on visibility, items stocked must be well-situated, easily accessed and clearly identified. Labels, signs, color codes and separation lines or boundaries will enhance any supermarket’s effectiveness.

When to replenish. The point at which an item needs to be replenished is defined by how long it takes to get that item, otherwise known as the item’s lead time. It stands to reason that items with long lead times need to be ordered earlier (higher level of inventory on-hand) than items with short lead times. Of course, if an item’s lead time is extremely fast, such as one day or even the same day, the need for that item to be included in a supermarket should be questioned.

To establish the point of replenishment for an item, we also need to know the quantity consumed each day. The daily consumption rate then is multiplied by the lead time to calculate the replenishment point (inventory level at which to reorder). If either the daily usage rate or the 
lead time for an item is highly variable, then a safety stock quantity may be needed. This 
quantity is added to the replenishment point to effectively get the item ordered sooner. For 
example, if the replenishment point is determined to be a five-day supply, or 100 pieces, the safety stock quantity could be two additional days, or 40 pieces, and the replenishment point increased to 140 pieces.

How many items to replenish. There is more flexibility in this decision than in the “when to order” calculation (which must always cover the replenishment lead time). The quantity to replenish can incorporate a number of factors. If the item is purchased and there are significant quantity price breaks, it may be advantageous to order more items less frequently. If the part is manufactured and there is significant machine setup time required (even after employing quick changeover techniques) there also may be an advantage to ordering a larger quantity each time there is a need for replenishment. Other factors to consider when calculating how many items to order are the time and cost associated with placing the order, material handling costs and lot charges that are incurred every time the item is ordered. These issues that support larger replenishment quantities must be balanced against the cost of carrying inventory (which I have covered extensively in prior columns, including my December 2012 column “Is Inventory Your Crutch?”, available at Ideally, you want a replenishment quantity that will yield the best overall cost for any item.

How to handle higher-than-normal demand. An unforeseen increase in demand for an item, known as a “spike,” will occur at some point in almost any supermarket. Typically, a spike is handled outside of the normal replenishment process, and procedures need to be established for such occurrences.

First, a spike quantity needs to be defined. A fixed quantity, or a percentage of the replenishment point for the item, is normally chosen. For example, if the replenishment point is 100 pieces and more than 50 percent of this quantity is required at one time, a unique replenishment order is generated for this specific requirement. If there is already a replenishment order in the works, this spike replenishment order should be added to that order, if possible. If there is no other replenishment order in the works, the spike replenishment order can either stand on its own or the normal replenishment order can be increased to cover both the spike and normal ordering requirements. Separately, the customer requesting the item (whether an external or internal customer) should be contacted to discuss how many parts are needed immediately and how many can be supplied when the replenishment order is completed.

Using the supermarket technique will help you “right-size” your various types of inventories.