Chapter 06

Inventory Control
Systems

Independent Demand
Inventory

Whole-sale and retail merchandise

Finished goods and spare parts for
replacement
Maintenance, Repair and Operating
Supplies
Service industry inventory

Inventory Control Systems for

Independent-demand items

Perpetual review system or, Q

System or, Continuous review system
Periodic review system or, P System

Continuous Review System

(Q System)

In this system a fixed quantity of the

material or item is ordered every time
whenever the inventory on hand
reaches a certain level referred to as
re-order level or order point.

Advantages of Q System

Control is provided by continuous

monitoring of inventory withdrawals
and inventory levels
Since the order quantity is fixed, the
EOQ is justified

EOQ Formula
EOQ =

2 X D X Co
p X Ci

Where, D = annual demand in units

Co = Ordering cost per order
P = Unit price in rupees
Ci = Inventory carrying charges as a
percentage of the value of average inventory

Re-Order Level

Re-Order Level =

(Normal or average demand rate) X

(Normal or average lead time)

Safety Stock
Safety Stock =
(Normal or average consumption rate)
X (Maximum extension of lead time)
X (Cumulative probability of that
extension)

Periodic Review System

(P System)

Inventory levels are reviewed at fixed

time intervals also known as review
period
Orders are placed for enough quantity
of material to bring the inventory level
back to some predetermined level
referred as desired inventory level (DIL)

Review Period
Review Period (R) = 12 Months
N
Whereas, N =
Annual Demand in Units
EOQ

Concept of Service Level

The service level is the probability that

the amount of inventory on hand during
the lead time is sufficient to meet
expected demand that is the probability
that a stock out will not occur.

Standard Deviation in Poisson

Distribution

Standard Deviation =
Average demand during lead time

Conditions that tend to

encourage higher levels of safety
stock

The cost or loss due to stock out may

be high
The cost of carrying safety stock may
be low
The variability or uncertainty of demand
may be high
The number of annual exposures to the
risk of stock-out may be high

Advantages of P System

Convenient because replenishments are made

at fixed intervals
Orders for multiple item from the same
supplier may be combined into a single
purchase order. This approach reduces
ordering cost and transportation costs
The inventory position needs to be known
only when a review is made and not
continuously as in Q system

Advantages of Q System

The frequent review of each item may

be individualized
Fixed lot sizes, if large enough may
result in quantity discounts
Lower safety stocks result in reduced
inventory carrying costs

Special Purpose Inventory

Models

A.
B.

Hybrid Systems
Optional Replenishment System
Base Stock System
Single Period Models

Miscellaneous Inventory
Systems
One-Bin System

Periodic replenishment regardless of

the quantity needed few or many

At fixed periods, the inventory is

brought up to its predetermined
maximum level

Two-Bin System

Items are used from one bin and the

second bin provides an amount large
enough to ensure that the stock can be
replenished. The second bin would
contain an amount equal to the re-order
point calculated in the Q system

Inventory Accuracy

Inventory accuracy refers to how well

the inventory record and the physical
count for an item stored agree with
each other.

Reasons for the differences

between the inventory record and
actual inventory (Physical)

The authorized removal may have been

done in a hurry and not recorded in the
inventory records
Sometimes items are misplaced and
traced after a considerably long time
Parts are often stored in several
locations but records may be lost or the
locations recorded wrongly

Cycle Counting

It is a physical inventory-checking
techniques in which inventory is
counted on a frequent basis rather than
once or twice a year

How can a firm keep accurate

up-to-date records?

Keep the store-room locked

Access has to be given only to
authorized
stores
personnel
and
inventory
accuracy
should
be
considered as one of their performance
measures

Continuous Inventory Level

The service level is the probability that

demand will not exceed the inventory
level. Calculation of service level is the
key to the determination of the
optimum level

Service Level

Service Level =

Cs
Cs + Ce
Whereas, Cs = Shortage cost per unit
Ce = Excess cost per unit