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You are here8B. Inventory Planning

8B. Inventory Planning

By Anonymous - Posted on 12 February 2012

The objectives of inventory management are to provide the required level of customer service and to reduce the sum of all costs involved. To achieve these objectives, 2 basic questions must be answered:

- How much should be ordered at time?
- When should an order be passed?

Management must establish decision rules. Lacking any better knowledge, decisions rules are often made based on what seems reasonable. Unfortunately, such rules do not always produce the best results.

Stock-keeping unit (SKU)
Control are exercised through individual items in a particular inventory. These are called a stock-keeping unit (SKU). 2 white shirts in the same inventory but of different sizes would be 2 different SKUs. The same shirt in 2 different inventories would be 2 different SKUs.
Lot-size decision rules
Lot, or batch, is a quantity produced together and sharing the same production costs and specifications. Following are some common decision rules for determining what lot size to order at one time.

The lot-for-lot rule says to order exactly what is needed. This technique requires time-phased information such as provided by a MRP or a MPS. Since items are ordered only when needed, this system creates no unused lot-size inventory. Because of this, it is the best method for planning “A” items and is also used in a just-in-time environment.

Fixed-order quantity
Fixed-order quantity rules specify the number of units to be ordered each time an order is placed for an individual item or SKU. The advantage is that it is easily understood. The disadvantage is that it does not minimize the costs involved.
A variation on this rule is the min-max system. In this system, an order is placed when the quantity available falls below the order point. The quantity ordered is the difference between the actual available at the time of order and the maximum.

Economic Order Quantity

Period Order Quantity

Order “n” periods supply
Rather than ordering a fixed quantity, inventory management can order enough to satisfy future demand for a given period of time.
Ideally, the ordering decision rules used will minimize the sum of the cost of ordering and the cost of carrying. The best known system is the economic-order quantity.

Independent Demand Ordering Systems
If stock is not reordered soon enough, there will be a stockout and a potential loss in customer service. However, stock ordered earlier than needed will create extra inventory. The problem then is how to balance the costs of carrying extra inventory against the cost of a stockout.

In industry there are many inventories that involve a large investment and where stockout costs are high. Controlling these inventories requires effective reorder systems. 3 basic systems are used to determine when to order:

- Order point system,
- Periodic review system,
- Material requirements planning.
The first two are for independent demand items; the last is for dependent demand items


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