Inventory Control Systems

 

Inventory control is concerned with minimizing the total cost of inventory. The three main factors in inventory control decision making process are:

* The cost of holding the stock (e.g., based on the interest rate).
* The cost of placing an order (e.g., for row material stocks) or the set-up cost of production.
* The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand.
 

 

The third element is the most difficult to measure and is often handled by establishing a "service level" policy, e. g, certain percentage of demand will be met from stock without delay.

In designing an inventory control system , we really provide answers to the three questions:

·How often should the inventory status be determined ?

This is an internal check system to

ascertain that timely action is being taken to replenish the stock  ·When should a replenishment order be placed ? This shows the actual action to be taken to replenish the stock.

·How large should the replenishment order be ?
A replenishment order should have a rational about its size. The real problem is to determine the inventory level at which money invested in inventory produces a higher rate of return than it would were it invested in some other phase of the business.

Designing Inventory control systems :
 

The Demand pattern (D) happens to be the soul of any Inventory control mechanism. Basically , inventory control is an attempt to balance the consumption and replenishment of stock of an item in an optimum manner. Obviously, the Demand pattern (D) sets the tone for devising any control measure and therefore while designing inventory control systems the nature of  demand pattern viz. independent or dependent needs to be determined first. The Control approaches differ on this differentiation.

Inventory control systems under Independent demand scenario :

Also called the Order-point control systems, Independent demand patterns for an item occur when future demand for it is not related to and is unaffected by its previous demand.
For example, in case of maintenance, repair, and operating supplies, a given item X may be used by many operating departments, and demand by each department may depend on many factors over which there can't be any control. Therefore, overall demand rates for the item X may vary unpredictably from period to period. In such cases, inventory levels may include provision for safety stock, in addition to the  the average demand rate, in order to prevent stock-out situation.

For inventories exhibiting independent demand pattern control is exercised based on predetermined order points. Such systems are so designed that whenever a predetermined point in inventory level or in time is reached action to re-order is taken.

There are two basic systems of managing or controlling Inventory under the independent demand pattern :
 

 

  1. Cyclical ordering or Fixed period system (Time based)
     

  2. Order point or Fixed order quantity system (Quantity based)
     

Inventory control systems under Dependent demand scenario :

Dependent demand occurs when the need for parts, supplies, or materials is dependent upon a predetermined usage or production schedule.

In such cases, a description and quantity of components needed and the exact date of each need is defined by a production schedule.

Required delivery dates for each component will then be offset by lead time, and orders will be placed accordingly. For example, if a pen manufacturing company plans to produce 1000 nos. of a given pen model in a period, it will need 1000 nibs, 1000 caps, etc., and will need them at the rate they will be installed in the finished pens. 

Such needs, with consideration for lead time, are considered in a dependent demand planned order schedule.
Material Requirement Planning is one example of a system specifically designed to manage dependent demand reorders

3) Material Requirements planning system

 

 

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