Three Types of Inventory Planning Models

Three Types of Inventory Planning Models

Someone once said everything is best in moderation. This couldn’t be any truer for handling inventory. Having either too much or too little can affect sales and profitability. That’s where inventory planning comes into play. In essence, a company needs to be able to analyze the demand and decide how much and when to order more. There are three popular models for companies to choose from.

Continuous Inventory Systems

This system keeps a constant track of quantities. Once they get below a predetermined level, managers order more. This quantity is decided on so inventory costs are kept low. The advantages of this inventory planning model include knowing stock in real-time, easy stock tracking, direct manager control and ease of seeing if something is in stock. The disadvantages include the need for pricey tracking software, complexity and time-consuming.

Periodic Inventory Systems

This method is as simple as counting every item by hand. Periodically, every piece of stock is counted. This might be weekly, monthly or some other specific interval. Once it’s all counted, an order is made based on the expected demand and what is actually on hand. All orders are placed at one time. The advantages of this inventory planning method include not needing any major preparations, and it’s simple as long as the company is not too large. The disadvantages include the complexity of tracking sales and problems that arise in between inventories.

EOQ or Economic Order Quantity Model

This model lets managers compute optimal quantities for orders to minimize the costs. It’s an actual formula that is used to calculate the best number of items that should be ordered to minimize costs and maximize value when inventory is being restocked. The disadvantage is the assumption of a steady demand without any changes.

Need more assistance with inventory planning? If you’d like help choosing a model, visit the Demand Solutions website.

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