Fundamentals of Business

Inventory Control Objectives

Twofold:
(1) Maximize customer service
(2) Minimize costs

1. Cost Objective: Minimize sum of relevant costs
2. Service Objective: desired customer service levels significantly impact inventory levels.
Service level may be defined in a number of ways, such as:

Inventory Control Models
Remember: two important issues in inventory control:
order quantity and order timing.
Two general classes of models: continuous review (fixed order quantity) and periodic review (fixed order period).

1. Continuous Review or Fixed Order Quantity Systems (Q-systems)
a. Multi period models

(1) Fixed order quantity, variable time between orders (EOQ, EPQ, and Quantity Discount)
(2) On-hand inventory balance serves as order trigger (R)
(3) Perpetual inventory count
(4) 2-bin system

b. Single period Model

2. Periodic Review or Fixed Order Period Systems (P-systems)
a. Variable order quantity, fixed time between orders
b. Time serves as order trigger
c. Periodic count
d. Process: When a predetermined amount of time has elapsed, a physical inventory count is taken. Based upon the number of units in stock at that time, OH, and a target inventory of TI units, an order is placed for Q = (TI-OH) units.

Fixed Order Quantity Systems (Q-systems):
How Much to Order (Q) and When to Order (R)
1. Multi Period Inventory Models: Order decisions for infinite length inventory planning address how much to order
a. How Much To Order: Basic Model - the Economic Order Quantity (EOQ or Q-System)