Principles of inventory management

Principles of inventory management

1. Demand forecasting

2. warehouse flow

3. inventory turn / stock rotation

4. cycle counting

5. process auditing

Types of inventory

1. Raw material
2. work in progress
3. finished goods
4. transit inventory
5. buffer inventory
6. anticipation inventory
7. decoupling inventory
8. cycle inventory
9. MRO ( maintenance, repair and operations ) inventory
10. theoretical inventory

ABC analysis - ABC analysis in inventory categorization technique often used in material management. It is also known as selective inventory control . Policies based on ABC analysis A items are very tight control and accurate records , B items are little less and C has the least ..

10 to 20 % item A account for 70 to 80 % of the consumption ..

The next 15 to 25 % B account for 10 to 20 % of the consumption .

The balance of 65 to 75 % C account for 5 to 10 % of consumption .

Basic inventory models

1. Basic EOQ model
2. Dynamic economic lot size model
3. Periodic review stochastic model

EOQ meaning - the economic order quantity is the number of units that a company should add to inventory with order to minimize the total cost of inventory such as holding cost, order cost and storage cost .

Total inventory cost = ordering costs + holding costs

EOQ = √ 2x quantity per order ÷ carrying cost per order

Safety stock= safety stock is also called buffer stock is a term used by logistician to describe a level of extra stock that is maintained to migrate risk of stock outs ( shortfall in raw material or packaging ) due to uncertainties in supply and demand ..

Functions of inventory control -

1. meet anticipated demand

2. smooth production requirements
decouple operations

3. protect against stock outs

4. take advantage of quantity discounts

5. permit operations

6. help hedge  price increases

7. take advantage of order cycles

Objectives of inventory control

1) level of consumer service

2) costs of ordering and carrying inventory .

Symptoms of poor inventory management

1. Increase back order status

2.  high customer turnover rate

3. increase dollar investment in inventory with back order remaining

4. periodic lack of sufficient space

5. increase number of order being cancelled

6. inventory rising faster than sales .