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
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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: EOQ=H2DS 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 50setupcostand2 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