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Inventory Control Notes

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Lecture 16: Inventory (Stock) Control Summary

• Introduction

• Deterministic Demand

• Variations on the Classic Stock Control Model


• Stock Control (Inventory Control) = The control of 'goods' to act as a buffer between supply and demand

• Stock or goods held as:
○ Finished goods for demand until the next batch is produced or supplied
○ In process goods held between production processes (i.e. machine spares for repair)
○ Goods before the production process (i.e. raw materials)

• The cost of holding stock:
○ Opportunity cost of capital tied up in stock
○ Cost of providing accommodation for stock
○ Cost of products that have a limited shelf-life
○ Cost of goods becoming obsolete

• The cost of ordering stock:
○ Administrative and delivery costs, or set-up costs for stock manufactured in house (labour, changing machine job, lost production time etc.)

• The cost of not holding stock:
○ Goods not in stock lead to customers waiting, going elsewhere or demanding discounts to await supplies
○ Production lines may be idle if stocks of raw materials are not available

• Two basic types of inventory policy:
○ Periodic Review:
 Stock checked at regular intervals
 Decisions on replenishment based on stock level at the time
 Increasingly being replaced by the next policy
○ Continuous Review:
 Stock levels checked continuously
 Decisions to replenish when stock falls to predetermined levels
 i.e. using EPOS systems

• Demand modes:
○ Stock can have deterministic demand or stochastic demand

Deterministic Demand: The Classic Stock Control Model

• Simplest stock control model

• Has four assumptions: a. Demand is constant i. Called Y (units) per unit time b. Orders for stock met immediately (zero lead-time) Course Notes Page 40

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