Inventory Control Guide Page 3
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402. Inventory Control
Here are several examples which illustrates the ins and outs of the inventory control.
These examples are drawn from the daily life. Try to find the rational which hides behind each
situation.
Examples :
buying coffee / filters
Let's refer to our Makecoffee example again. How often do you buy coffee and filters? Don't
you buy coffee more often than filters? Why? What are the reasons for that?
going to the department store
Where do you make your shopping? Do you go to the department store where you buy
everything or to different specialized shops (bakery, butcher, ...)? Why?
buying cigarettes / breads
The smokers usually buy their cigarettes on a daily basis. Why? Are there situations where big
lots are bought at once? What about buying breads ?
washing the dishes
Usually, the dishes are washed after each meal, sometimes once a day, seldom once a week.
Why don't we clean each dish after we used it?
Factors :
setup
order in big lots
Going to the store is a setup operation. Prepare the water for washing the dishes is a setup
too. When preparing pancakes, the first one we scrap because it’s too oily is a setup too.
When ordering things, the preparation of the order (paper work, calls), its transport and its
reception can all be seen as setup operations whose cost is fixed and independent of the
quantity which is bought. When launching a production order, the preparation of the
environment (raw material), the setup of the machines and the first items that are scrapped for
quality reasons can all be seen as setup operations whose costs are fixed and independent of
the quantity which is then produced.
The cost associated to the setup operations favors ordering in big lots.
capital
order in small lots
Coffee is more expensive than filters. Cigarettes are very expensive. Nobody wants to invest
money too early if it is not necessary. By delaying the investments, the money can be used in
the mean time, possibly for generating interests.
The money which is invested in goods (coffee, cigarettes) has thus a cost: the loss of the
return which could have been made if the money was available. This cost is called opportunity
cost of the money. It depends on the opportunities you have ?
This cost favors ordering as late as possible and just what is needed (in small lots).
This applies to purchasing (raw material) and production (finished goods) similarly.
depreciation
order in small lots
Filters and cigarettes do not get bad. They could remain a long time in our inventory. Coffee
does get bad, breads too. We do not buy them in big quantities.
The risk that things get bad, out-of-date, deteriorated or obsolete favors building low
inventories, that is, ordering as late as possible and as few as possible (small lots).
This is valid for raw material and for finished goods.
shortage risk
keep a safety stock
We buy many things (bread, cigarette, wine) before the weekend in case of. Because many
shops close during the weekend, we loose the possibility of buying things just when they are
needed. We cannot get immediately, that is in zero time, what we want. The delay between
the moment we want something and order it and the moment we receive the order is called
the "order lead time".
When the order lead time in not zero and when the demand is not exactly known, there is a
risk of falling short. In order to balance this risk, a safety stock can be built.
Prod 2100-2110
Inventory Control
2
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