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Inventory Management System

Inventory control is concerned with minimizing the total cost of inventory. In the U.K. the term often used is stock control. The three main factors in inventory control decision making process are:

  • The cost of holding the stock (e.g., based on the interest rate).
  • The cost of placing an order (e.g., for row material stocks) or the set-up cost of production.
  • The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand.

The third element is the most difficult to measure and is often handled by establishing a "service level" policy, e. g, certain percentage of demand will be met from stock without delay.

The ABC Classification The ABC classification system is to grouping items according to annual sales volume, in an attempt to identify the small number of items that will account for most of the sales volume and that are the most important ones to control for effective inventory management.

Reorder Point: The inventory level R in which an order is placed where R = D.L, D = demand rate (demand rate period (day, week, etc), and L = lead time.

Safety Stock: Remaining inventory between the times that an order is placed and when new stock is received. If there are not enough inventories then a shortage may occur.

Safety stock is a hedge against running out of inventory. It is an extra inventory to take care on unexpected events. It is often called buffer stock. The absence of inventory is called a shortage.


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