Classification of Inventory Systems

Lot Size Re-order Point Policy:

As soon as inventory level falls to a predetermined value (called Re-order Point), a replenishment order is placed as per EOQ. The order size is constant; and it is economically determined. It is a classical type of inventory policy. While adopting this system, lead time which the gap between the placing of the replenishment order and its subsequent receipt is taken into account

Fixed order internal scheduling policy:

Under this policy, the time between two immediate orders is kept constant. Here, maximum stock level is predetermined. At fixed time intervals, intervals, inventory levels are determined. At each determination of inventory level, an order of size is placed which allows the current inventory level of go up to the maximum stock level. The order size may vary from time to time.

Optional Replenishment Policy:

Popularity it is branded as (s,S) policy. The inventory level is periodically reviewed and maximum (S) minimum (s) stock levels are prescribed. While reviewing, its stock on hand (inventory level) is ≤ s, an order of size Q is placed so that stock on hand inventory level) becomes equal to maximum stock level (= S). If the inventory level > s, S and T (review period).

Other types of inventory system:

There are some special cases, for instance, for slow moving items we may modify (s, S) model to (S1, s) or one for one order policy. Here when maximum stock level is up to S and still there is a demand for one unit, a replenishment of one unit is ordered.

Combination of lot size order policy and fixed interval order policy are feasible. In some systems, more than one reorder point is established, making it a multiple re-order point policy.

Static Inventory systems have to take one purchase decision for the entire project duration

The right choice of an inventory policy depends upon the environmental factors. The operating policy is chosen first to determine the values of its parameters.

Selective Inventory management:

What is selective inventory management?

Scientific inventory control is a formidable task when we consider an enormous number of items a large organization is expected to stock. Even if the organization thinks of the uniform inventory control over all these large number of items, it will become counter productive since the cost will far exceed the benefits. This is the logic behind selective inventory control. Selective inventory control considers the factors like the value of the inventory item, it is critically and its usage frequency. Control which is selective is more effective, and is directed to more significant groups of items. In this system, the items are categorized in anew discrete groups depending upon value, critically and usage frequency. Three such methods of selective control are popular: ABC Analysis, VED Analysis, and FSN analysis. Such grouping paves the way for, scientific inventory control in the organization.

ABC Analysis:

ABC Analysis is a basic analytical management tool which enables top management to place the efforts where the results will be greatest. This technique popularly known as “Always Better Control” has universal applications in many areas of human endeavor. The technique tries to analyze the distribution of any characteristic by money value of importance in order to determine priority. In materials management, this technique has been applied in areas needing selective control, such as inventory, critically of items, obsolete stocks, purchasing order, inspection etc.

Quite a number of management problems can be successfully solved by remembering this simple 20 / 80 law, popularly known as Pareto’s Law of “CAUSE AND EFFECT” The law states that “Only 20% of the activity causes 80% of effect”. The following are a few illustrations.

1) 20% of the machines are responsible for 80% of the total down time
2) 20% of the end products generally account for 80% of total revenue
3) 20% of the clerks make 80% of the clerical errors
4) 20% of the employees create 80% of the problems.
5) 20% of the customers are responsible for 80% of the bad debts
6) 20% of the total items in the stock account for 80% of the total expenditure on the materials.

This 20 / 80 ratio is a very useful concept in business where it can be used to solve some production control, quality control, inventory control ad similar other management problems. The exact percentage may fluctuate on either side but the principle stays. So, the golden rule is to keep an eye on this 20% and you will cover 80% of the effect.

This concept when applied to stock items is called ‘ABC Analysis’.

  • You can also mention perpetual inventory systems. This classification involves the continuous updating of the inventory with the use of scanner systems integrated with a software in a computer.