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Unit 9: Inventory Planning and Control

where consignment inventory programs have an important role, it is important to measure the Notes
performance of these programs.
Inventory obsolescence measures can be very important for items with short shelf lives, due to
aging or technological changes.
Finally, collecting accurate data on which to construct inventory measures can be challenging.
Processes have to be in place to ensure that inventory is counted accurately and on a timely
basis.

9.5 Inventory Control Systems

An effective inventory control system should provide satisfactory answers to three questions:
1. How often should the assessment of stock on hand be made?
2. When should a replenishment order be placed?

3. What should be the size of the replenishment order?

In fixed quantity systems, the parameters that define a fixed reorder quantity system are ‘Q’,

the fixed amount ordered at one time, and reorder point. These systems are common where

a perpetual inventory record is kept or where the inventory level is under sufficiently close
surveillance so that notice can be given when the reorder point has been reached.
In a ‘time’ triggered system, the inventory status is reviewed on a periodic basis, and an order is
placed for an amount that will replenish inventories to a planned maximum level. The reorder
quantity therefore varies from one review period to the next. The economic reorder cycle would
then be EOQ/R, where R is the annual requirement.
Example: If EOQ = 10,000 units and annual requirements are R = 120,000 units, then the
economic cycle would be 10,000/120,000 = 1/12 or 1 month.
One advantage of this system is that it sometimes makes operating efficiencies possible by

reviewing the status of all items at the same time. However, inventory holding costs are usually
higher than those associated with the continuous review system.
The following facts describe the important differences that determine the choice of the system
that should be used:
1. The time triggered system requires less manpower to control. In the event triggered system,
each item must be counted as it is issued or demanded. In the time triggered system,
physical inventory count is taken only at the end of the period. This system is especially
good for fast moving raw materials and supplies.
2. The time triggered system requires less calculating time than the event triggered system.
In the event triggered system, each issue or demand from stock must be recorded and
accounted for. Systemic costs i.e. the costs of running the system are generally less with the
time triggered system.
3. The time triggered system may require more buffer stock to protect against uncertain

demand and lead time. The reorder time is often non-optimal as it is fixed either weekly or
monthly, and not based solely on economics, resulting in higher physical inventory costs.

4. The time triggered system runs the risk in more stock outs when unusually high fluctuation
in demand occurs. When one or successive periods of unusually large demand occur, the
event triggered system can react more quickly because it keeps track of net inventory with
each unit demanded.

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