Quick Summary: Strategically set default Replenishment Cycles and Target Fill Rates using AH and CH classification categories as practical examples.
For necessary background, please preread Mastering Policy Defaults before proceeding.
The Goal: Balancing Competing Needs
Setting your policy defaults is a strategic balancing act. You must consider the competing needs of your working capital (financial targets), administrative requirements (planners’ time), and physical warehouse space. The goal is to set a different policy for each of the nine classification buckets that aligns with its specific value and velocity profile.
Step 1: Analyze the Bucket Data
Navigate to Classification > Matrix.
Click on the bucket you want to analyze (for example, CH).
Review the pop-up and check the Demand row to see the average monthly demand value for items in this bucket.
Step 2: Apply Strategic Thinking (Example: CH Bucket)
The CH bucket contains items that are inexpensive but move very fast, such as chewing gum or straws.
Analysis: Suppose the Demand row shows an average monthly demand of $11.6k. The current policy is an RC of 90 days (ordering $34.8k at a time) and a 98% target fill rate.
Goal: Save planner time by ordering less frequently.
Proposed change:
Increase RC from 90 to 120 days. This means ordering $46.4k at a time. Because these items are inexpensive, the modest increase in working capital is acceptable and reduces administrative workload.
Increase Target Fill from 98% to 99%. Because these items are inexpensive and customers expect them in stock, the higher fill rate improves service with limited financial impact.
Step 3: Apply Strategic Thinking (Example: AH Bucket)
The AH bucket contains items that are very expensive and also move very fast.
Analysis: Suppose the Demand row shows an average monthly demand of $1.5m. The current policy is an RC of 21 days and a 97% target fill rate.
Goal: Reduce the amount of working capital tied up in this expensive inventory.
Proposed change:
Decrease RC from 21 to 7 days. Applying a long RC (for example, 120 days) would be financially prohibitive (for example, a $6m order). A shorter RC keeps inventory levels aligned with working capital targets.
Decrease Target Fill from 97% to 95%. The slight reduction lowers required safety stock and overall holding cost for this expensive category.
How To: Assign Policy Defaults
➜ Read: How To: Assign Policy Defaults
⚠️ Watchouts
One Size Fits All: A policy default applies to every item in the bucket. A change to the AH default will impact all high-value, high-velocity items.
💡 Tips
Use Overrides for Exceptions: If a single “bread-and-butter” item in AH requires a 99% fill rate, do not change the entire bucket’s default. Use a Policy Override for that specific item to manage by exception.
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