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Inventory Control Notes

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This is an extract of our Inventory Control document, which we sell as part of our Operational Research Techniques Notes collection written by the top tier of LSE students.

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Lecture 16: Inventory (Stock) Control Summary

* Introduction

* Deterministic Demand

* Variations on the Classic Stock Control Model

Introduction

* 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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