Inventory management helps businesses reduce costs while improving efficiency and customer satisfaction. There are many ways in which you can manage your inventory. Inventory control models help make it easier to get the right amount of inventory.
In this blog post, we understand the different types of inventory models. We will also learn about the inventory management models and techniques useful for your manufacturing business.
What Is the Inventory Management Model?
Inventory control models are methods used by businesses to find the best quantity and timing for stock reordering. This helps to minimize costs and meet demand in time. They help in balancing ordering, holding, and stockout costs to make inventory management efficient. Using models of inventory control you can reduce operational expenditures and storage fees to save your company money.
What Are the Three Most Common Inventory Control Models?
Each inventory model uses a different method to figure out how much inventory you need. Here are the three inventory control models often used by Indian SME manufacturers:
1. Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ) is an inventory management technique that tells you how many inventory units to order to reduce costs based on your company's holding and ordering costs and demand rate. But, the EOQ model of inventory control makes assumptions that won't apply to every business. It assumes that your rate of demand, purchasing expenses, and inventory unit pricing are stable.
Here is how to calculate your EOQ:
Economic Order Quantity = square root of [2(setup cost x demand rate] / Production cost Or EOQ = square root of (2DS/H)
- D is the demand in units
- S is the order cost per purchase order.
- H is the holding costs per unit
The EOQ number is not useful if you frequently experience fluctuation in your inventory or order quantity.
2. Inventory Production Quantity
This Economic Production Quantity, or EPQ, tells you how many items you have 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.
This model might be a good fit for your company if you 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
ABC Analysis is used alongside other inventory management models. In this, your inventory is arranged according to its importance using the ABC model of inventory control. A manufacturer’s stock is divided into group A, group B, or group C. You decide which category to assign inventory to with the help of the Pareto Principle.
| 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 contribution to overall revenue. Category B inventory is less important to the business. Despite being the majority of the stock, category C inventory makes the least revenue and therefore requires the least attention.
Other Inventory Management Models
In addition to the above three, there are various types of inventory models in operations management that are useful for businesses. Some of the most common inventory management models are:
1. Fixed Reorder Quantity System
This model 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. A reorder point is a specific level of inventory, after which restocking is requested.
2. Fixed Reorder Period System
This is a 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
Inventory management is an important task. Most of the manufacturers manage their inventory using digital software. There are many options available in the market for you to choose. It is important that you use the best inventory management software for implementing inventory control methods.
TranZact is an easy to use software that helps you track your inventory levels in actual time and receive alerts when an order has to be placed. It keeps your company operating smoothly with inventory control techniques 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 predict 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, making sure of 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.
7. What are the most common types of inventory control methods?
There are various types of inventory models. The most common inventory control methods are ABC Analysis, Just In Time (JIT), Material Requirements Planning (MRP), Economic Order Quantity (EOQ), Safety Stock, First In, First Out (FIFO) and Last In, First Out (LIFO), Batch Tracking, and Perpetual Inventory System.
8. What is EOQ in inventory control?
Economic Order Quantity (EOQ) in inventory control refers to the ideal order quantity a company should purchase to minimize its inventory costs, such as holding costs, shortage costs, and order costs.
