Inventory Control Systems | Introduction to Management Science (10th Edition)

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An inventory system is a structure for controlling the level of inventory by determining how much to order (the level of replenishment) and when to order. There are two basic types of inventory systems: a continuous (or fixedorder quantity ) system and a periodic (or fixedtime period ) system . The primary difference between the two systems is that in a continuous system, an order is placed for the same constant amount whenever the inventory on hand decreases to a certain level, whereas in a periodic system, an order is placed for a variable amount after an established passage of time.

Continuous Inventory Systems

In a continuous inventory system , alternatively referred to as a perpetual system or a fixedorder quantity system , a continual record of the inventory level for every item is maintained . Whenever the inventory on hand decreases to a predetermined level, referred to as the reorder point , a new order is placed to replenish the stock of inventory. The order that is placed is for a "fixed" amount that minimizes the total inventory carrying, ordering, and shortage costs. This fixed order quantity is called the economic order quantity ; its determination will be discussed in greater detail in a later section.

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In a continuous inventory system, a constant amount is ordered when inventory declines to a predetermined level .

A positive feature of a continuous system is that the inventory level is closely and continuously monitored so that management always knows the inventory status. This is especially advantageous for critical inventory items such as replacement parts or raw materials and supplies . However, the cost of maintaining a continual record of the amount of inventory on hand can also be a disadvantage of this type of system.

A simple example of a continuous inventory system is a ledger-style checkbook that many of us use on a daily basis. Our checkbook comes with 300 checks; after the 200th check has been used (and there are 100 left), there is an order form for a new batch of checks that has been inserted by the printer. This form, when turned in at the bank, initiates an order for a new batch of 300 checks from the printer. Many office inventory systems use "reorder" cards that are placed within stacks of stationery or at the bottom of a case of pens or paper clips to signal when a new order should be placed. If you look behind the items on a hanging rack in a Kmart store, you will see a card indicating that it is time to place an order for this item, for an amount indicated on the card.

A more sophisticated example of a continuous inventory system is a computerized checkout system with a laser scanner, used by many supermarkets and retail stores. In this system a laser scanner reads the Universal Product Code (UPC), or bar code, off the product package, and the transaction is instantly recorded and the inventory level updated. Such a system is not only quick and accurate, but it also provides management with continuously updated information on the status of inventory levels. Although not as publicly visible as supermarket systems, many manufacturing companies, suppliers, and distributors also use bar code systems and handheld laser scanners to inventory materials, supplies, equipment, in-process parts, and finished goods.

Because continuous inventory systems are much more common than periodic systems, models that determine fixed order quantities and the time to order will receive most of our attention in this chapter.

Periodic Inventory Systems

In a periodic inventory system , also referred to as a fixedtime period system or periodic review system , the inventory on hand is counted at specific time intervalsfor example, every week or at the end of each month. After the amount of inventory in stock is determined, an order is placed for an amount that will bring inventory back up to a desired level. In this system the inventory level is not monitored at all during the time interval between orders, so it has the advantage of requiring little or no record keeping. However, it has the disadvantage of less direct control. This typically results in larger inventory levels for a periodic inventory system than in a continuous system, to guard against unexpected stockouts early in the fixed period. Such a system also requires that a new order quantity be determined each time a periodic order is made.

In a periodic inventory system , an order is placed for a variable amount after a fixed passage of time .

Periodic inventory systems are often found at a college or university bookstore. Textbooks are normally ordered according to a periodic system, wherein a count of textbooks in stock (for every course) is made after the first few weeks or month during the semester or quarter. An order for new textbooks for the next semester is then made according to estimated course enrollments for the next term (i.e., demand) and the number remaining in stock. Smaller retail stores, drugstores, grocery stores, and offices often use periodic systems; the stock level is checked every week or month, often by a vendor, to see how much (if anything) should be ordered.

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Time Out: For Ford Harris

The earliest published derivation of the classic economic lot size model is credited to Ford Harris of Westinghouse Corporation in 1915. His equation determined a minimum sum of inventory costs and setup costs, given demand that was known and constant and a rate of production that was assumed to be higher than demand.