Purchase orders & replenishment strategies: tailored approaches by production type

5. Purchase orders and replenishment

5. Purchase orders and replenishment 

With clear inventory policies in place, managing replenishment and purchase orders becomes a matter of executing timely and sticking to rules set upfront. The complexity here depends once again on the type of business.  

Different replenishment approaches fit distinct production environments: remember from the earlier section: Engineer-to-Order (ETO), Make-to-Order (MTO), Assemble-to-Order (ATO), and Make-to-Stock (MTS) - each with unique requirements for handling demand variability, inventory policies, and therefore also for purchase orders & replenishment. 

ETO: Engineer-to-Order 

  1. For ETO firms, products are often complex, custom-built to specification, as in aerospace or specialized machinery. Due to high customization, finished goods inventory is minimal, and planning focuses on raw materials and components based on confirmed orders. Purchase orders here are generated after a customer order has been received, often requiring precise estimations per project phase. 
  2. -> Replenishment policy: Project-based MRP is crucial for accurate material scheduling.  

 

Make-to-Order (MTO) 

  1. In MTO environments, production begins only after an order is placed, often for unique or customizable products (e.g., specific electronic configurations). MTO companies aim to reduce finished goods inventory by focusing on essential components across all orders. 
  2. -> Replenishment Policy: MRP plans component stock based on historical demand and lead times. Safety stock is prioritized for high-demand or long-lead-time items to enable fast order fulfilment.  

Assemble-to-Order (ATO) 

  1. ATO companies maintain semi-finished goods or base models that can be rapidly assembled with customer-selected features. For example, an automotive company may have base models on hand, adding customizations upon order. 
  2. -> Replenishment Policy: MRP and Kanban manage base inventory, while specific custom parts are stocked based on forecasted demand. This approach balances flexibility for customer preferences with low holding costs. 

MTS: Make-to-Stock 

  1. MTS firms, such as those in FMCG (e.g., Coca-Cola), rely on high-demand forecasts to produce goods in advance, aiming to minimize lead time for customer orders. Inventory management here focuses on balancing finished goods levels against forecasted demand. 
  2. -> Replenishment policy: ROP and EOQ (Reorder Point & Economic Order Quantity) are essential. ROP policies replenish stock automatically when inventory drops to a set level, while EOQ minimizes total inventory costs by balancing order and holding expenses. Safety stock levels are carefully calculated to accommodate variability in demand forecasts. 

Reseller / no manufacturing 

  1. For companies that primarily purchase and resell products, inventory management is generally less complex. These companies don’t face manufacturing lead times and typically reorder based on demand projections & supplier lead times. 
  1. -> Replenishment policy: reorder point with supplier coordination is straightforward, ensuring product availability with minimal holding costs, given that raw materials and production variables aren’t factors.