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Basic inventory principles

First it’s important to remarck that inventory control is an inexact science. This will give us an introduction to  basic inventory principles:

Importance of inventory costs.

What are the typical costs involved? (inventory cost drivers):

  • Facility costs
  • Human capital: The cost of labor to maintain storage
  • Finance costs.
  • Management costs.
  • Procurement costs: costs of purchasing.
  • Inventory turnover.
  • Sock accuracy
  • Service levels: critical goods, non critical goods, scheduled delivery

Strategies to better manage inventory:

  • Vendor managed inventory: lower cost of supply
  • Postponement logistics: process of postponing service of goods until demand, offering a faster respond to a designated market

But could we explain what is inventory control in 2 minutes?

By managing inventory we should be able to answer the following questions:

  • How much to purchase?
  • How much to manufacture?
  • When to buy?
  • How often to buy?

By controlling inventory we should work on

  • Reconcilying: Difference between how many units do we have in our warehouse vs how many units the IT system belives
  • Inventory turnover: Annual sales/Stock
  • Days of stock your are holding: Stock/Daily sales


Important parameters:

  • Review period
  • Lead time
  • Stock level

Reording policies:

  • Reorder point (continuous review policy) depends on the product. Usually   if stock<ROP then order (q). It’s the demand during the lead time. ROP=d*L+Z*SigmaSQR(L)
  • Periodic review method: if (tiem has arrived) then order (OUL-Stock). It’s quite used, specially when you manage many products. You need a calendar, because each product has a different review time. Here the quantity we order is not constant

Both policies could be considered only one (s,S): When time arrives, if the stock is less than S, then order (S-stock)

Time and stock is almost the same thing

Order up to level means the maximum expected demand during (review period + lead time)

From time to time I look at my stock. Once I check it I order for a different quantity. I have to control the time, the stock and the quantityDepending on my stock level I order

Interesting links:

The whole Mercadona stock is only 2 days

Categories: Inventory control Tags: , ,
  1. Annith Klink
    December 7, 2011 at 4:06 am

    Thanks, learnt alot about inventory

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