Inventory control

Inventory control

The process of managing the timing and the quantities of goods to be ordered and stocked, so that demands can be met satisfactorily and economically. Inventories are accumulated commodities waiting to be used to meet anticipated demands. Inventory control policies are decision rules that focus on the trade-off between the costs and benefits of alternative solutions to questions of when and how much to order for each different type of item.

The possible reasons for carrying inventories are: uncertainty about the size of future demands; uncertainty about the duration of lead time for deliveries; provision for greater assurance of continuing production, using work-in-process inventories as a hedge against the failure of some of the machines feeding other machines; and speculation on future prices of commodities. Some of the other important benefits of carrying inventories are: reduction of ordering costs and production setup costs (these costs are less frequently incurred as the size of the orders are made larger which in turn creates higher inventories); price discounts for ordering large quantities; shipping economies; and maintenance of stable production rates and work-force levels which otherwise could fluctuate excessively due to variations in seasonal demand.

The benefits of carrying inventories have to be compared with the costs of holding them. Holding costs include the following elements: cost of capital for money tied up in the inventories; cost of owning or renting the warehouse or other storage spaces; materials handling equipment and labor costs; costs of potential obsolescence, pilferage, and deterioration; property taxes levied on inventories; and cost of installing and operating an inventory control policy. Inventories, when listed with respect to their annual costs, tend to exhibit a similarity to Pareto's law and distribution. A small percentage of the product lines may account for a very large share of the total inventory budget (they are called class A items).

Continuous-review and fixed-interval are two different modes of operation of inventory control systems. The former means the records are updated every time items are withdrawn from stock. When the inventory level drops to a critical level called reorder point, a replenishment order is issued. Under fixed-interval policies, the status of the inventory at each point in time does not have to be known. The review is done periodically.

Uncertainties of future demand play a major role in the cost of inventories. That is why the ability to better-forecast future demand can substantially reduce the inventory expenditures of a firm. Conversely, using ineffective forecasting methods can lead to excessive shortages of needed items and to high levels of unnecessary ones.

Material requirements planning (MRP) systems (which are production-inventory scheduling softwares that make use of computerized files and data-processing equipment) are receiving widespread application. MRP systems have not yet made use of mathematical inventory theory. They recognize the implications of dependent demands in multiechelon manufacturing (which includes lumpy production requirements). Integrating the bills of materials, the given production requirements of end products, and the inventory records file, MRP systems generate a complete list of a production-inventory schedule for parts, subassemblies, and end products, taking into account the lead-time requirements. MRP has proved to be a useful tool for manufacturers, especially in assembly operations.

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Robby. ME