Inventory policies

Q:  I do not understand how production output is allocated among the market areas.  Can you please explain this process?

A:  Your firm has developed a set of policies to guide product allocation. The allocation priorities are as follows:

1. Goods held in inventory by a sales office will not be shipped to another area or country but will be held for sale in the area where they are located. They were produced according to the quality and features specifications prescribed for that sales office and thus may be a different product than the ones sold in other areas.

2. Sales office orders will be filled only from your firm's current-quarter production.  Shipments will be allocated to fill sales office orders before filling any additional customer orders in a producing area. These shipments include those to all sales offices, both in areas with manufacturing plants and in areas without a plant. For sales offices in producing areas, "shipment" constitutes setting goods aside in the plant’s warehouse for sale to local area customers.

3. If a plant's production will exceed the number of units in the local sales office order,  the excess production capacity will be used to produce product to ship to other area sales offices after the local sales office order has been completely filled. In other words, sales offices in producing areas are given priority and will have their total order filled (given sufficient production in the area), even if there is not enough production to fill orders of other sales offices.

4. If an area's production is less than the local sales office order, the shortage will be entered in a request for shipment from a plant in another area (if there is one).

5. Then, any excess production capacity at each plant will be used to produce goods to meet the demands of unfilled sales office orders from all areas. If production capacity equals or exceeds the orders from sales offices in non-producing areas plus unfilled orders from areas where plants could not meet their sales office orders, all orders are filled. Otherwise, they are pro-rated according to the size of the orders.

6. If production capacity is available to fill orders from more than one plant, sales office orders are filled first from non-home area plants in the following order beginning with M/N/P/S (the fourth market area), then from the two domestic non-home areas (the order is Merica 1, Merica 2, Merica 3) and finally from the home area. Shipments are made to sales offices in the following order:  Merica 1, Merica 2, Merica 3 and finally to M/N/P/S.  The bottom line is that the sales office in each market area must manage its own inventory.  Failing to do so may result in stockouts even though other areas have inventory left over.