Inventory Control Models

1. INVENTORY
CONTROL MODELS

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. Economic Order Quantity
• Total Cost = Purchase Cost + Order Cost + Carrying Cost
Balance to find the Optimal Order Size(Q*)
•
Q* =

9. Economic Order Quantity
• S = Order Cost
• D = Annual units demanded
• H = Carrying Cost

10. Reorder Point (ROP)
• A reorder point is the unit quantity that triggers the purchase of a
particular stock item.

11. Reorder Point (ROP)
• Lead time demand: Lead Time
47 day of sales

12. 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.

13. 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).

14. 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

15. Reorder Point (ROP)
470 (Lead time Demand) + 340 (Safety stock)
Reorder point = 810

16. FOUR INVENTORY MODELS
• Raw Materials
• Unfinished Products
• In-Transit Inventory
• Cycle Inventory

17. 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.

18. 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.

19. 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.

20. 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.