Inventory control is concerned with minimizing the total cost of
inventory. The three main factors in inventory control decision making
* The cost of holding the stock (e.g., based on the interest
* 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
·How often should the inventory status be determined ?
This is an internal check system to
ascertain that timely action is being taken to replenish
·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
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.
systems are so designed that whenever a
predetermined point in inventory level or
in time is
reached action to re-order is taken.
two basic systems of managing or controlling Inventory under
the independent demand pattern :
Cyclical ordering or Fixed period system (Time based)
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.
cases, a description and quantity of components needed
and the exact date of each need is
defined by a production schedule.
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
it will need 1000 nibs, 1000 caps,
etc., and will need them at the rate they will be
installed in the finished pens.
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