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Inventory Control Models

The document summarizes four popular inventory control models: ABC analysis, inventory production quantity, economic order quantity, and reorder point. It also describes four types of inventory: raw materials, unfinished products, in-transit inventory, and cycle inventory.

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Adner Cabalo
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472 views

Inventory Control Models

The document summarizes four popular inventory control models: ABC analysis, inventory production quantity, economic order quantity, and reorder point. It also describes four types of inventory: raw materials, unfinished products, in-transit inventory, and cycle inventory.

Uploaded by

Adner Cabalo
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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INVENTORY

CONTROL MODELS
Inventory Control Models

Inventory model is a mathematical model that helps business in


determining the optimum level of inventories that should be
maintained in a production process, managing frequency of
ordering, deciding on quantity of goods or raw materials to be
stored, tracking flow of supply of raw materials and goods to
provide uninterrupted service to customers without any delay in
delivery.
What are the inventory control
models?
Three of the most popular inventory control models are
Economic Order Quantity (EOQ), Inventory Production
Quantity and ABC Analysis. Each model has a different
approach to help you know how much inventory you
should have in stock. Which one you decide to use
depends on your business.
ABC Analysis

• ABC analysis (or ABC classification) is used by inventory management teams


to help identify the most important products in their portfolio and ensure they
prioritize managing them above those less valuable
• Category A: this is the smallest category and consists of the most important
stock items
• Category B: will generally be slightly larger in terms of volumes of SKUs and
will usually be made up of products of less value
• Category C: this will typically be the largest category where products will
contribute the least to your business’s bottom line.
Inventory Production Quantity
• Also known as Economic Production Quantity, or EPQ, this inventory
control model tells you the number of products your business should order
in a single batch, in hopes of reducing holding costs and setup costs. It
assumes that each order is delivered by your supplier in parts to your
business, rather than in one full product. 
Inventory Production Quantity
• This model is an extension of the EOQ model. The difference between the
two models is the EOQ model assumes suppliers are delivering
inventory in full to your customer or business.
Economic Order Quantity
• The Economic Order Quantity inventory management method is one of
the oldest and most popular. EOQ lets you know the number of inventory
units you should order to reduce costs based on your company holding
costs, ordering costs and rate of demand. 
Economic Order Quantity
• Total Cost = Purchase Cost + Order Cost + Carrying Cost
Balance to find the Optimal Order Size(Q*)

•
Q* =
Economic Order Quantity
• S = Order Cost
• D = Annual units demanded
• H = Carrying Cost
Reorder Point (ROP)
• A reorder point is the unit quantity that triggers the purchase of a
particular stock item.
Reorder Point (ROP)
• Lead time demand: Lead Time

47 day of sales
Reorder Point (ROP)
• Lead time demand: Average Daily use

Sells 310 watches per month (310watch/31days=10)


10 watches per day

If 47 days is the lead time, and you can sell 10 watches per day
Then 47 x 10 = 470 watches a month is all you need to tide them
Over until the next shipment arrives.
Reorder Point (ROP)
• Safety stock is buffer stock you carry as a last defense against
unpredictable events that either deplete your stock (surge in demand), or
unexpected manufacturing time (your lead time skyrockets because the
supply chain breaks down).
Reorder Point (ROP)
• Safety stock

10 watches average daily sales


15 watches maximum daily sales
47 days average lead time
54 days maximum lead time

340 units of safety stock


Reorder Point (ROP)

470 (Lead time Demand) + 340 (Safety stock)

Reorder point = 810


FOUR INVENTORY MODELS

• Raw Materials
• Unfinished Products
• In-Transit Inventory
• Cycle Inventory
Raw Materials

A raw material, also known as a feedstock,


unprocessed material, or primary commodity, is a
basic material that is used to produce goods,
finished products, energy, or intermediate materials
that are feedstock for future finished products.
Unfinished Products

Items that are used to produce


finished goods items. Unfinished goods are
often called components, ingredients, raw
materials, semi-processed materials, and
subassemblies.
In-Transit Inventory

Transit inventory as the name suggests is


the inventory that has been shipped by the seller
but has not yet reached the buyer's destination.
Since the inventory is in-transit it is also called
pipeline inventory and believe it or not it is a
crucial part of inventory management.
Cycle Inventory

Cycle stock inventory, also referred to as working stock,


is the portion of inventory available to meet normal
demand during a given period. Cycle stock inventory is
the level of inventory a retailer or manufacturer uses for
their standard business cycle to satisfy regular sales
orders or sales forecasts.

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