Inventory Control Models And The Driving Factor In Each Model

Question

Explain the three inventory control models and the driving factor in each model. Provide examples for each one using current companies.

Sample Answer

It is vital for companies to maintain an optimum level of inventory. Nevertheless, this is not an easy undertaking. Several models have been developed for determining the optimum level of inventory. The ABC analysis, economic order quantity, and inventory production quantity are some of the inventory control models. The ABC analysis categorizes inventory into three categories, A, B, and C, with A comprising of the most important items and C comprising of the least important items. As such, these inventory control methods puts more focus on the critical few items (A) instead of the many trivial items (C). Inventory items in group A are vital to the functioning of the company.

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Therefore, their inventory levels should be monitored closed. Inventory items in this group usually comprise of 70% of a company’s business in monetary value and 10% of items in the inventory. On the other hand, items classified in group B are not vital to the operations of the company. They usually comprise of 20% of a company’s business in monetary value and items in the inventory. Finally, items in group C account for 70% of the items in the inventory but a mere 10% of the company’s business in monetary value. Teradyne, a company based in North Reading, Massachusetts, which manufactures automation equipment, is one of the major companies that use ABC analysis to control its inventory (Khan & Jain, 2007).

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Economic order quantity (EOQ) is one of the most popular and oldest inventory control models. It is easy to use this inventory control model as it makes several assumptions. These include that demand is known and constant, the lead-time is also known and constant, there are no quantity discounts, and that if an organization places orders at the right time, shortages and stockouts can be eliminated. EOQ strives to reduce total costs of carrying inventory. When a company places an order quantity Q, the inventory level increases by the corresponding amount. The costs of carrying the inventory also increase. The optimal order size Q* is the order quantity that minimizes total costs. EOQ strive to ensure that a company maintains an optimal order size to reduce the costs associated with carrying inventory. Proctor & Gamble (P&G), the largest company that manufactures and sells consumer products, uses this inventory control model (Khan & Jain, 2007).

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Inventory production quantity (EPQ) is an inventory control model that strives to determine the quantity of product that a company should manufacture in a single batch to reduce total costs, which include inventory holding costs and setup costs. Increase in the batch production quantity leads to a reduction in the number of batches produced annually. Therefore, it reduces the set up costs. However, the inventory holding costs increase. At the EPQ value, both of the two costs are at their minimum value. Coca-cola is one of the companies that uses EPQ model to control its inventory (Khan & Jain, 2007).

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