INVENTORY MANAGEMENT MODEL

Inventory Management Model

Inventory Management Model

Data, uncontrollable inputs, and decision variables that influence total inventory cost

Inputs are quantities or factors that affect the situation. Inputs can be uncontrollable or controllable. Controllable inputs, also called decision variables, are quantities or factors that a decision maker can change (usually within limits) for the current situation. In an order-quantity situation, the decision maker has control over how much quantity to order. Uncontrollable inputs, sometimes called parameters, are quantities or factors that are important to the situation but are outside the decision maker's direct control.

Model for calculating cost

In order to place a fixed order for Q units we will use economic order quantity model to forecast the minimum need of the company. The economic order quantity seeks to find the amount of order that minimizes total inventory cost of the company. One of the tools used to determine the optimal amount of request for an inventory item is the model of economic order quantity (EOQ). It takes into account the different financial and operational costs and determines the amount of order to minimize inventory costs of the company. The model of economic order quantity is based on three fundamental assumptions: the first is that the company knows what is the annual use of items found in inventory, second that the frequency with which the company uses the inventory is not varies with time and finally that orders are placed to replace stocks of inventory are received at the exact moment when inventories are depleted (James, 1996)

Assumptions of EOQ (Economic Order Quantity)

Constant and known demand

A single product

The products are produced or purchased in batches

Each item or order is received in a single shipment

The fixed cost of issuing an order is constant

The lead time (waiting time) is known and constant

No breakdown of stock

No volume discounts

Basic Costs

Among the costs that must be taken into account in the implementation of this model are:

Ordering costs: these are the expenditures that include the fixed costs of office to place and receive an order, that is, the cost of preparing a purchase order processing and verification upon delivery. These are expressed in terms of costs or costs per order. Inventory maintenance costs, unit variable costs are costs of maintaining an item in the inventory for a given period. Among the most common are storage costs, insurance costs, the costs of deterioration and obsolescence and opportunity costs. These are expressed in terms of cost per unit per period. Total costs: It is to be determined by the sum of ordering and inventory maintenance costs. Its objective is to determine the amount of order that minimizes (Hax, 1984).

Implementation

This model can be used to control stock items in the inventories of the company. The economic order quantity can be calculated by two main approaches, one a graphic and a mathematical type, the following are its basis.

Graphical Method

The economic order quantity can be found graphically representing amounts of order on the x axis and costs on the y ...