Inventory management is primarily about specifying the size and placement of stocked goods (Wikipedia).
There are three basic reasons for keeping inventory (Wikipedia):
- Time lags - lead time between each stage in the supply chain
- Uncertainty - uncertainty in demand, supply and movement
- Economies of scale
There are various types of inventory, which include (Wikipedia):
- Raw materials - materials and components scheduled for use in making a product.
- Work in process, WIP - materials and components that have begun their transformation to finished goods.
- Finished goods - goods ready for sale to customers.
- Goods for resale - returned goods that are salable.
ABC Analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost and helps to identify different categories of stock that will require different management and controls (Wikipedia). A more complete discussion of ABC analysis, including calculation procedures is given here.
A A cycle count is an inventory auditing procedure where a small subset of inventory, in a specific location, is counted on a specified day (Wikipedia). For example, if the policy is to manually count the A cateogry items once per month (20 working days), the B items once per quarts (60 working days) and the C items once every six months (120 working days) you can calculate how many SKUs of each type should be counted each day as:
- Count the number of SKUs for category A, B and C
- Divide the number of SKUs for each category by the number of working days in the cycle count period for that category (see above). That gives you the number of SKUs of each category that should be counted each day.
- Assign that number of SKUs of each type to a manual count schedule. This smoothes out the manual counting across all working days.
Perpetual Inventory Systems
A perpetual inventory or continuous inventory describes systems of inventory where information on inventory quantity and availability is updated on a continuous basis as a function of doing business. Generally this is accomplished by connecting the inventory system with order entry and in retail the point of sale system (Wikipedia). For continuous review systems, the economic order quantity is the most common method.
The economic order quantity is the order quantity that minimizes total inventory holding costs and ordering costs (Wikipedia). For a more detailed description of the EOQ model including how to calculate its parameters, click here.
Periodic Inventory System
Periodic inventory is a system of inventory in which updates are made on a periodic basis (Wikipedia). For a more detailed description of the periodic inventory model including how to calculate its parameters, click here.
Single Period Inventory System
A single period inventory model is used to identify the amount of inventory to purchase given a perishable good or single opportunity to purchase. For a more detailed description of the single period inventory model including how to calculate its parameters, click here.