• Inventory Management

    There are three techniques for inventory management:

    • ABC Approach
    • Economic Order Quantity Model
    • Managing Derived-Demand Inventories

    The ABC (Always Better Control) Approach

    It is a simple approach in which the main idea is divide the inventory into three (or more) groups based on the quality, quantity or significance of their usage. In some cases, companies use different raw materials with different price level and different quantities which have significant impact on the overall inventory cost.

    Suppose 20% of first type of product accounts for 70% of the annual value, 30% of the second type of product accounts for 20% of the annual value, so on. After analyzing the distribution of these products, the uniform purchase quantity of each type of products is determined.

    The Economic Order Quantity Model

    The Economic Order Quantity Model (EOQ) is the best-known approach for explicitly establishing an optimal inventory level. The Economic order quantity is decided based on the carrying cost and holding cost of the inventories which aims to minimize the same.

    This model is applicable when the ordering cost is fixed, demand is stable and known in advance, the purchase price is fixed and products are delivered at one go without any break. Using the model, we calculate the economic order quantity based on demand, holding cost and carrying cost.

    Managing Derived-Demand Inventories

    The third type of inventory management techniques is to manage demand-derived inventories. Demand for some inventory types is derived from or dependent on other inventory needs. In auto manufacturing industry, the demand for finished products depends on consumer demand, marketing programs, and other factors related to projected unit sales.

    There are two types of Managing Derived-Demand Inventories:

    • Materials Requirements Planning
    • Just-in-Time (JIT) Inventory

    Materials Requirements Planning

    Production and inventory specialist have developed computer-based systems for ordering and scheduling production of demand dependent types of inventories. These systems fall under the general heading of material requirements planning (MRP).  The basic idea behind MRP is that, once finished goods inventory levels are set, it is possible to determine what level of work-in-progress inventories must exist to meet the need for finished goods. From there, it is possible to calculate the quantity of raw materials that must be on hand.

    Just-in- Time (JIT) Inventory

    This is a modern approach for managing dependent inventories. The goal of JIT is to minimize such inventories, thereby maximizing turnover. The approach began in Japan, and it is a fundamental part of Japanese manufacturing philosophy. It has been used for Toyota very successfully.  As the name suggests, the basic goal of JIT is to have only enough inventory on hand to meet immediate production needs.

    The result of JIT system is that inventories are recorded and restocked frequently.  Making such a system work and avoiding shortages requires a high degree of co-operation among suppliers.

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