4.2 Inventory Control Systems and Models

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 Economic Order Quantity (EOQ) model helps optimize order quantities, balancing ordering and holding costs. However, real-world applications often require adjustments for demand variability and lead time uncertainties.

Inventory Control Systems

Purpose of inventory control systems

• 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

• Periodic review model uses fixed time intervals between orders with variable order quantities requiring higher safety stock simpler to implement suitable for items with stable demand (office supplies)
• Continuous review model 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: $EOQ = \sqrt{\frac{2DS}{H}}$ 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 $50 setup cost and $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:
  1. Need for safety stock in real-world scenarios
  2. Importance of demand forecasting accuracy
  3. Impact of supplier reliability and lead time variability