4.2 Inventory Control Systems and Models
2 min read•july 25, 2024
Inventory control systems are crucial for balancing stock levels, minimizing costs, and ensuring customer satisfaction. These systems monitor inventory movements, provide real-time data, automate reordering, and enhance visibility across multiple locations.
Two main models exist: periodic review, which uses fixed time intervals, and continuous review, which constantly monitors stock levels. The model helps optimize order quantities, balancing ordering and holding costs. However, real-world applications often require adjustments for demand variability and uncertainties.
Inventory Control Systems
Purpose of inventory control systems
Top images from around the web for Purpose of inventory control systems
The synergistic and complementary effects of supply chain justice and integration practices on ... View original
Is this image relevant?
Supply Chain Integration | Levels & Barriers to Supply Chain Integration View original
Is this image relevant?
Development of a Tool Cost Optimization Model for Stochastic Demand of Machined Products View original
Is this image relevant?
The synergistic and complementary effects of supply chain justice and integration practices on ... View original
Is this image relevant?
Supply Chain Integration | Levels & Barriers to Supply Chain Integration View original
Is this image relevant?
1 of 3
Top images from around the web for Purpose of inventory control systems
The synergistic and complementary effects of supply chain justice and integration practices on ... View original
Is this image relevant?
Supply Chain Integration | Levels & Barriers to Supply Chain Integration View original
Is this image relevant?
Development of a Tool Cost Optimization Model for Stochastic Demand of Machined Products View original
Is this image relevant?
The synergistic and complementary effects of supply chain justice and integration practices on ... View original
Is this image relevant?
Supply Chain Integration | Levels & Barriers to Supply Chain Integration View original
Is this image relevant?
1 of 3
- Maintain optimal inventory levels balancing overstocking and stockouts minimizing holding costs ensuring customer satisfaction
- Monitor inventory movements tracking stock levels recording incoming and outgoing goods
- Provide real-time inventory data supporting decision-making enabling accurate forecasting
- Automate reordering processes triggering purchase orders when stock reaches reorder point streamlining procurement activities
- Enhance inventory visibility across multiple locations (warehouses, retail stores) facilitating efficient stock allocation
Periodic vs continuous review models
- uses fixed time intervals between orders with variable order quantities requiring higher simpler to implement suitable for items with stable demand (office supplies)
- constantly monitors inventory levels using fixed reorder point orders placed when stock reaches threshold requires lower safety stock more responsive to demand fluctuations needs advanced technology for real-time tracking (fast-moving consumer goods)
Inventory Control Models and Applications
Application of EOQ model
- EOQ formula: where D: Annual demand, S: Setup cost per order, H: Holding cost per unit per year
- Minimize total inventory costs balancing ordering and holding costs
- Calculate optimal order quantity determining optimal number of orders per year
- Compute total annual inventory cost
- Example: A retailer selling 1000 units annually with 2 holding cost per unit would have an EOQ of 158 units
Assumptions in inventory control
- Common assumptions include deterministic demand lead time certainty no quantity discounts single item focus
- EOQ model limitations ignore variability in demand and lead time assume infinite production capacity disregard perishable items (fresh produce)
- Periodic review constraints potential for higher inventory levels less responsive to sudden demand changes
- Continuous review drawbacks higher implementation and maintenance costs requires sophisticated inventory management systems
- Practical application considerations:
- Need for safety stock in real-world scenarios
- Importance of accuracy
- Impact of supplier reliability and lead time variability
Key Terms to Review (19)
Consignment Inventory: Consignment inventory is a supply chain arrangement where goods are placed in the possession of a retailer or distributor, but ownership remains with the supplier until the goods are sold. This setup allows retailers to stock products without upfront costs, reducing their financial risk while providing suppliers a way to increase market presence and sales. It plays a crucial role in inventory optimization and control systems by balancing inventory levels and managing cash flow effectively.
Continuous Review Model: The continuous review model is an inventory management strategy that involves monitoring inventory levels on a constant basis to determine when to reorder stock. This model helps organizations maintain optimal inventory levels while minimizing holding costs and preventing stockouts, thus ensuring a seamless supply chain process. It relies on real-time data and analysis to inform replenishment decisions, making it crucial for effective inventory control.
Cycle Stock: Cycle stock refers to the portion of inventory that a business keeps on hand to meet regular demand during a specific period. This stock is replenished as it is used up, ensuring that there are always enough products available to fulfill customer orders without overstocking. Understanding cycle stock is essential for managing inventory costs and implementing effective inventory control systems.
Demand forecasting: Demand forecasting is the process of estimating future customer demand for a product or service based on historical data and market analysis. It plays a crucial role in guiding inventory management, production planning, and supply chain strategies, helping businesses align their resources with expected demand fluctuations.
Economic Order Quantity (EOQ): Economic Order Quantity (EOQ) is a formula used to determine the optimal order quantity that minimizes total inventory costs, including holding costs and ordering costs. This model plays a crucial role in inventory management as it helps businesses manage their stock levels efficiently, ensuring they do not overstock or run out of products. By calculating the ideal order quantity, organizations can achieve a balance between maintaining sufficient inventory and minimizing excess costs.
Enterprise Resource Planning (ERP): Enterprise Resource Planning (ERP) is an integrated software platform used by organizations to manage and streamline their core business processes across various departments, ensuring that information flows seamlessly throughout the organization. ERP systems provide a unified database and real-time visibility into operations, which is crucial for efficient inventory control, effective warehouse management, and comprehensive supply chain integration.
Fill Rate: Fill rate is a key performance metric that measures the percentage of customer demand that is met through immediate stock availability. It reflects how well a company can fulfill orders from existing inventory without backorders or delays. A high fill rate indicates effective inventory management and contributes to customer satisfaction, while a low fill rate can lead to lost sales and decreased loyalty.
First-in, first-out (FIFO): First-in, first-out (FIFO) is an inventory management method where the oldest stock of inventory is sold or used first, ensuring that items are used in the order they were received. This approach helps maintain the freshness of products, especially perishable goods, and minimizes the risk of obsolescence or spoilage. By prioritizing the sale of older items, FIFO also aids in accurate financial reporting and inventory valuation.
Inventory accuracy: Inventory accuracy refers to the degree to which the recorded inventory levels match the actual physical stock available in a warehouse or store. High inventory accuracy is crucial for effective inventory management as it ensures that businesses have reliable data for decision-making, reduces stock discrepancies, and enhances customer satisfaction by preventing stockouts or overstock situations.
Inventory Management Systems (IMS): Inventory Management Systems (IMS) are software tools and processes that help organizations manage their inventory levels, track stock movements, and optimize the ordering and replenishment of products. These systems are essential for maintaining an efficient supply chain, as they ensure that the right amount of inventory is available at the right time to meet customer demand while minimizing carrying costs and reducing stockouts.
Inventory Turnover: Inventory turnover is a financial ratio that measures how many times a company sells and replaces its inventory within a specific period, usually a year. A high inventory turnover rate indicates efficient inventory management, as products are sold quickly, while a low turnover rate may signal overstocking or weak sales performance.
Just-in-time (JIT): Just-in-time (JIT) is a production and inventory management strategy aimed at reducing waste by receiving goods only as they are needed in the production process, thereby minimizing inventory costs. This approach emphasizes the importance of timing and coordination in supply chains, ensuring that materials and products arrive exactly when required, which helps companies increase efficiency and respond quickly to customer demand.
Last-in, first-out (LIFO): Last-in, first-out (LIFO) is an inventory valuation method where the most recently acquired items are the first to be used or sold. This method assumes that the last items added to inventory are the first ones to leave, impacting both inventory management and financial reporting. It is particularly relevant for businesses that sell perishable goods or items that fluctuate in price, as it can affect profit margins and tax liabilities.
Lead Time: Lead time is the total time taken from the initiation of a process until its completion. This includes the time required to procure materials, manufacture products, and deliver them to customers. Understanding lead time is crucial as it impacts inventory management, production scheduling, and overall supply chain efficiency.
Periodic Review Model: The periodic review model is an inventory management approach where stock levels are evaluated and replenished at regular intervals. This system helps organizations balance the costs of holding inventory against the potential risks of stockouts by scheduling reviews at set time periods, regardless of the inventory levels at that moment. By consistently monitoring inventory at predetermined intervals, businesses can respond effectively to demand fluctuations and ensure they maintain optimal stock levels.
Reorder Point (ROP): The reorder point (ROP) is the inventory level at which a new order should be placed to replenish stock before it runs out. This critical metric ensures that inventory is maintained at optimal levels, helping to prevent stockouts and excess holding costs. By calculating the ROP, businesses can effectively balance supply and demand, enabling smooth operations and customer satisfaction.
Safety Stock: Safety stock is the extra inventory kept on hand to prevent stockouts due to uncertainties in demand and supply chain disruptions. It acts as a buffer against variability in lead times, unexpected spikes in demand, and other unforeseen circumstances that could disrupt regular inventory levels. By maintaining safety stock, businesses can improve service levels and ensure that they can meet customer demands even when faced with unexpected challenges.
Stock Keeping Unit (SKU): A Stock Keeping Unit (SKU) is a unique identifier assigned to a specific product or item in inventory, used for tracking and managing stock levels. SKUs help businesses categorize products, streamline inventory management, and enhance sales tracking by providing detailed information about each item, including its attributes like size, color, and price. This systematic identification aids in efficient inventory control systems and models.
Vendor-Managed Inventory (VMI): Vendor-managed inventory (VMI) is a supply chain practice where the vendor takes responsibility for managing and replenishing inventory at the retailer or customer’s location. This approach fosters collaboration between suppliers and retailers, as the vendor monitors inventory levels and decides when to restock based on agreed-upon inventory thresholds. By doing so, VMI enhances efficiency in inventory control and can lead to reduced stockouts, improved service levels, and lower overall inventory costs.