Inventory control models help make it easier to get the right amount of inventory. They also make up for not having enough stock, which can cause financial and customer losses. So how do you calculate the quantity of items to order? Inventory control models come into play in this situation. You'll discover some of the most popular inventory control models in this article to help you reduce expenses and save money.
What Is the Inventory Management Model?
Inventory control models are the procedures for keeping enough stock and assets to keep your firm operating correctly. Before moving on, we need to understand what an inventory control model is used for and why it's important.
Maintaining the "just right" inventory balance is vital to good inventory control. You want to be sure you have enough products to satisfy consumers, but you must also avoid ordering inventory that might not sell on time. Inventory management lowers costs while assisting your company in maintaining the proper inventory level.
A good inventory control system can give you crucial information about your inventory. You may learn which items are selling well and which aren't, which ones you should have on hand, and how much is required.
Once you know these facts, you can reduce operational expenditures and storage fees to save your company money.
What Are the Three Most Common Inventory Control Models?
ABC Analysis, Inventory Production Quantity, and Economic Order Quantity (EOQ) are three of the most often used inventory control models.
Each inventory model uses a different method to figure out how much inventory you need. Your business will decide which one to use.
1. Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ) is a popular inventory management technique. It tells you how many inventory units to order to reduce costs based on your company's holding and ordering costs and demand rate.
How to determine your EOQ is as follows:
Economic Order Quantity = square root of [2(setup cost x demand rate] / Production cost
However, the EOQ contains several significant assumptions that won't apply to every business. It presumes that your rate of demand, purchasing expenses, and inventory unit pricing are stable.
The EOQ number will be meaningless if you frequently experience fluctuation in your inventory or order quantity.
2. Inventory Production Quantity
This Economic Production Quantity, or EPQ, instructs you on how many items to order for your company in a single batch to cut down on setup and holding expenses. It is based on the idea that each order is delivered to your company by your supplier in pieces rather than as a whole product.
The EOQ concept is expanded upon in this model. The EOQ model differs from the other models in that it presumes suppliers will deliver all the inventory to your client or company.
This model might be a good fit for your company if, like an automotive provider, you typically place inventory orders from suppliers in pieces rather than in bulk or if the demand for your products is steady over time.
3. ABC Analysis
For best results, ABC Analysis is frequently used alongside other inventory management models, such as the Just in Time (JIT) method. Your inventory is arranged according to degrees of significance using the ABC assessment. You know where to focus by specifying which stock is the main one.
Stock is divided into bunch A, bunch B, or bunch C. So how would you decide which category to assign inventory to? It depends on the Pareto Principle, sometimes known as the 80/20 rule:
| Category | Description | Percentage of Stock | Percentage of Income |
|---|---|---|---|
| A | Inventory with high value and importance, accounting for 20% of the stock and 70% of income | 20 | 70 |
| B | Inventory with moderate value and significance, accounting for 30% of the stock and 25% of income | 30 | 25 |
| C | Inventory with low value and income contribution, accounting for 50% of the stock and 5% of income. | 50 | 5 |
- Category A stock is subject to strict ordering rules because of its high value and substantial contribution to overall revenue.
- Category B inventory is less vital to the business's survival but still essential.
- Despite constituting the majority of the stock category C inventory generates the least revenue and therefore requires the least management attention.
Other Inventory Management Models
The basic model of inventory control includes various other models, such as:
1. Fixed Reorder Quantity System
A Fixed Reorder Quantity System is an inventory model which replenishes the inventory to a required level with fresh orders. The system depends on the demand, and an alarm alerts when the level of reordered inventory drops below a fixed quantity.
In this system, reorder point refers to a specific location where inventory is requested for restocking. The quantity of inventory ordered by reorder point is mentioned with Reorder Level.
2. Fixed Reorder Period System
The Fixed Reorder Period System is an inventory model for managing inventories, in which an alert is generated after each fixed time period. Based on the alert, orders are generated to refill the stock to the required level based on demand. In this case, restocking inventory is a continuous interaction carried out after each specified period.
Streamline Inventory Control Model Trend With TranZact
Using the best inventory management software is essential to implementing your inventory control methods. Track your inventory levels in actual time with TranZact and receive alerts when an order has to be placed.
Keep your company operating like a well-oiled machine alongside your inventory control technique with TranZact’s inventory management software.
FAQs on Inventory Control Models
1. What is a probabilistic model of inventory control?
A probabilistic model of inventory control uses probability distributions to estimate product demand and improve inventory levels when product demand is unknown.
2. How does the inventory control model in operations research work?
The inventory control model in operation research uses mathematical tools to find appropriate inventory policies, considering aspects such as demand variability, holding costs, and ordering costs.
3. How does the periodic review system function in inventory control?
The periodic review system determines the inventory amount at set intervals and sets orders to refill stock to that level.
4. How can a PowerPoint presentation on inventory control models be helpful?
The inventory control models ppt (PowerPoint presentation) can provide a concise and visually engaging overview of different models, their concepts, and their application in optimizing inventory management.
5. How can the reorder point model benefit inventory control?
The reorder point model determines the inventory level at which a new order should be placed to avoid stockouts, ensuring a smooth flow of goods and minimizing disruption in operations.
6. What are some common challenges addressed by inventory control models in operations research?
Operations research uses inventory control models to solve problems such as demand variability, lead time uncertainty, optimum order amounts, and finding the ideal holding cost/stockout ratio.
