Business

Logistics
SCMGT200-23B (VTN)
Week 4: Inventory Control
Structure/Layout
1) Overview: Inventory Control
2) Inventory control systems
• 2-bin system
• Continuous review system
• Periodic review system

3) Inventory performance Indicators

• Inventory turnover and inventory days of
supply
• Fill rate and stockout rate
• Shrinkage rate

4) Class Activity (CA3) - Case Study Analysis

5) AOB
 1. Overview – Inventory
Control
Inventory control is the process of ensuring the right
amount of supply is available in an organization.
Unlike inventory management, inventory control
regulates what is already in the warehouse.
The aim is to maximise the benefit or profit from the
investment in stock without affecting production and
customer requirements or satisfaction.
• Inventory control helps avoid the many costs
related with buying too much inventory and the
strains of stockout events.
Inventory control plays several roles including
enabling businesses to assess the current state of
assets, financial reports, and avoid out-of-stock costs.
Every business requires inventory which it manages
through inventory control systems.
2. Inventory Control Systems

2-bin
system

Inventory
control
systems Inventory
available control

Continuous Periodic
review review
system system
 2-bin system
Basic inventory control system based on items kept in 2
separate bins.
 The stock of the 1st bin is used until the bin is empty
 A replenishment order is placed as soon as the 1st bin is
empty
 The 2nd bin contains enough items to cover the replenishment
lead time
 Low-cost approach typically used to replenish low-value items
requiring no records of use.
Continuous Review System

 Also known as ‘fixed order quantity model’ or ‘Q model’

 The system is based on a pre-determined minimum inventory level (reorder-level)

 The inventory position is computed and monitored every time items are
withdrawn from the inventory (i.e., after each transaction)
 An order is placed as soon as the inventory level drops to the reorder level

 The order quantity is fixed and based on the Economic Order Quantity (the order
size that minimises the total cost of inventory)
Continuous Review System Ctd

Reorder level: the pre-determined inventory level that triggers a replenishment

action
 Reorder level = Average usage during the replenishment lead time +
Buffer inventory
 Average usage during the replenishment lead time: the time it takes to obtain the
goods multiplied by the number of units used during the same period
 Buffer inventory: the extra inventory (i.e., safety stock) maintained to deal with
uncertainty (e.g., unexpected demand fluctuations or late supplier deliveries)
Example: Continuous Review
System
Establishing the re-order level

Replenishment lead time 1 week

Average weekly usage 100 units

Average usage during the replenishment lead time 1 x 100 = 100 units

Agreed buffer inventory 25 units

Reorder level 100 + 25 = 125 units

Continuous Review System Ctd
Inventory level (units)

Economic
Reorder order
point quantity

125 Reorder point

Average usage during the

Level of replenishment lead time (100)
inventory

25
Buffer inventory
0
Time
Economic Order
Quantity
Economic order quantity (EOQ) - The order
quantity that minimises the total cost of inventory

Where:
• D = Annual usage (items)
• O = Ordering cost ($)
• H = Holding cost per unit and per year ($)
Illustration of
the EOQ
Model
Assumptions of the Fixed Order Quantity
• Demand for the product is constant
and uniform throughout the period.
• Lead time (time from ordering to
receipt) is constant.
• Price per unit of product is constant.
• Inventory holding cost is based on
average inventory.
• Ordering or setup costs are constant.
• All demands for the product will be
satisfied. (No backorders are allowed.)
Benefits of the Continuous
Review System
• The system keeps the total value of inventory to a minimum (the
economic order quantity minimises the total cost of inventory)
• Less stock is carried because the inventory level is controlled
continuously
• Simplified ordering system since the order quantity is fixed
• Appropriate to manage the stock of costly items
• Appropriate for important items (high-value items) or items for
which demand fluctuations are high.
• Can adapted to A, B or C items.
Periodic Review System

Also known as ‘fixed time period model’ or ‘P model’

• The inventory level is monitored, and orders are placed at pre-determined
times (e.g., every week or every month).
• The frequency of the review period is based on the importance of items.
• Generally associated with a maximum stock level (top-up system).
• The order quantity depends on the usage rate => the periodic review system
generates order quantities that vary from period to period.
Illustration - Periodic Review
System
Time
between
orders
Inventory level (units)

Maximum stock level

Buffer inventory

Time
Adv/Disadvantages - Periodic
Review System
Advantages Disadvantages
 Ordering activities can be planned  Large customer orders may draw
into the work schedule the stock down to zero and this
 Relatively simple and easy to situation may go unnoticed until
maintain the next review period.
 Economies of scale can be achieved  Requires a higher level of safety
by ordering multiple items at the stock than the continuous review
same time and by consolidating system (buffer against stockouts).
these items into a single shipment
 Can be adapted to A, B or C
 Appropriate to manage the stocks of
categorisation of items.
medium-cost items
Continuous vs Periodic Review
Systems
Feature Continuous review system Periodic review system

Order quantity Same amount ordered each time Varies each time an order is placed
When inventory position drops to
When to place order When the review period arrives
the reorder level
Inventory level in
Minimum stock level Maximum stock level
place
Recordkeeping Each time a withdrawal or an
Only at the time of the review
(inventory position) addition is made
Larger than continuous review
Size of inventory Less than periodic review system
system
Higher due to continuous Efficient as ordering activities are
Time/cost to maintain
recordkeeping planned into the work schedule
Medium-cost items (e.g., “B”
Types of items High-value items (=> “critical few”)
items)
3. Inventory Management
Performance
Inventory performance indicators

The total value of inventory may be of interest from an accounting

perspective but is not useful in logistics.

Useful measures of inventory performance are useful to logisticians when

deployed to determine:

• How well inventory levels are controlled

• How well customers are served

Follow Up –
Research
Exercise
During your free time, undertake some
research to establish the definitions of
the following Inventory Management
Performance Indicators.

Inventory cycle counting

Inventory turnover
Cost of goods sold
Inventory days of supply
Fill rate
Stockout rate
Shrinkage rate
Conclusion

 This topic explains models that are appropriate for controlling

inventory when it is difficult to predict exactly what demand will be
for an item in the future.
 Inventory is expensive mainly due to storage, obsolescence,
insurance, and the value of the money invested.
 The basic questions that need to be answered include among
others: when should an item be ordered, how large should the
order be, and what is the average usage and lead time?
 Several costs should be considered when establishing and
inventory control system: the cost of the item itself, the cost to
hold an item in inventory, setup costs, ordering costs, and stockout
costs.
Class Activity
(CA3)
Group Exercise (CA3)
Analyse the case study: Sell, Stow, or Dump? Retailers Wrestle with
Mountain of Unsold Stock. Identify at least four inventory issues faced by
the fashion industry during the COVID-19 pandemic. Suggest any practical
measures that could have help alleviate the effect of the identified issues
in the case study.
Instructions
 Form random groups with a maximum of 5 members. Once done,
agree on a group name, and elect a group leader for this class
exercise.
 Discuss the question above and post your discussion on the forum.
 The elected group leader is responsible for posting a summary of
the group's discussion. The title/subject/topic of the post should
include: the group name, and names of all the group members
(e.g., Team Global: Mary Robertson, Derek Friday, & Lee Chan).
 Individuals are encouraged to comment on any of the posts on the
discussion forum.
 Note: This activity will be graded.
References

1) Pienaar & Vogt

(2016/2017).
Business
Logistics
Management,
5th edition, Oxford
University Press
2) Murphy &
Knemeyer
(2018).
Contemporary
Logistics, 12th
edition