TYPES OF CONTROL SYSTEM

Perpetual Inventory System

This system is based on the economic order quantity (EOQ) and the reorder point. The perpetual system
is completely defined by knowing the order size (Q) and the minimal stock level that signals the placing
of an order. Under this system the reorder point and order quantity are fixed, the review period and
demand rate are variable, and the lead time can be fixed or variable. The major disadvantage of the
perpetual system is that it requires perpetual auditing of the inventory in stock to know as quickly as
possible when the reorder point is reached. Further weakness of the perpetual system may become
evident if:

1. Reorder point, order quantities, and safety stocks are not restudied or change for years.
2. Delay are encountered in posting transactions.
3. Error or mistakes are made in posting transactions.
4. Numerous independent orders result in high freight costs.
5. Supplier discounts based on the dollar volume of orders are forfeited.

On the positive side, the fixed order size system with perpetual records is excellent for independent
demand items needing close control. It is extremely useful in the situations as well as others, because:

1. An efficient, meaningful order size Is used.

2. Safety stock is needed only for the lead time period.
3. The system is relatively insensitive to forecast and parameter changes.
4. Inventory checks are related to usage; slow-moving items receive less attention.

Two-Bin Inventory System

The two-bin inventory system is a version of the fixed order size system which operates without
perpetual record keeping. Inventory usually is stored in two bins; upon order receipt, an amount equal
to the reorder point is put into one bin, and the reminder of the order is placed in another bin. Stock is
taken first from the bin which contains the difference between the order quantity and the reorder point.
When stock in this bin is depleted, an order is released. Demands then are filled from the second bin,
containing the expected lead time quantity plus any safety stock (reorder point quantity). But the two-
bin system can only be used when no more than one replenishment order is outstanding because the
two-bin system does not provide open order information. Therefore, the order quantity must always be
greater than the reorder point. The two-bin system is suited best for items of low value of fairly
consistent use and short lead times, such as office supplies, nuts, bolts, and so forth.

Periodic Inventory System

In a periodic inventory system the number of items in storage is reviewed at a fixed time interval. A
count must be taken of the goods on hand at the designed inventory review date. The size of
replenishment order depends upon the number of units in stock at that time. Therefore, the order
quantity varies from period to period, and the decision makes changes the quantity ordered to reflect
changes in the demand rate. The periodic system can provide the following benefits for joint orders:

1. A reduction in ordering cost may be possible because items are processed under a single order.
2. Suppliers may offer discounts for purchase exceeding a given dollar volume. The lumping of
several items into a single order can make the discount more attainable.
3. Shipping costs may be significantly decreased if an order is of a convenient size such as a boxcar.
This can often be accomplished by the simultaneous ordering of several items.

The manner in which the perpetual and periodic systems customarily initiate replenishment orders not
only affects their ability to engage in consolidated ordering but also holds implications for their safety
stock requirement. The periodic system will require a larger safety stock for a given item than the
perpetual system. However, some or all of the additional safety stock expanse may be justified by the
economies achieved from joint orders.

Optional Replenishment Inventory System

The optional replenishment inventory system is a hybrid of the perpetual and periodic system. Stock
level are reviewed at regular intervals, but orders are not placed until the inventory position has fallen
to a predetermined reorder joint. But remember that both the perpetual and the periodic system are
defined by only two parameters, in contrast to three for the optional replenishment system. The
instatement of the reorder point as a third defining parameters permits orders to be placed in efficient
quantities; it reduces the cost which may result from frequent placement of small orders in the two-
parameter periodic system. However, the optional replenishment system is indistinguishable from the
periodic inventory system when the review period is so long that an order is trigged at almost every
review.

Distribution Requirements Planning Inventory System

Distribution requirement planning (DRP) is a method of handling stock replenishment in a multiechelon

distribution environment. It applies time-phased logic to products in a distribution network in a manner
similar to the way MRP applies it to the subassemblies and components of products in a manufacturing
bill of materials network. DRP, like MRP, distinguishes between independent and dependent demand.
All demands in a distribution network are dependent except at the level the network to derive inventory
demand at all higher levels. Although gross requirements must be forecasted at the local distribution
level, they can be calculated at all the other levels. Based on the future visibility of requirements, DRP
replenishes what has been consumed in succeeding levels of a distribution network.

Single Order Quantity Inventory System

The single order quantity system is not really an inventory system in general category for handling the
variety of items that are ordered infrequently or only once, They tend to be unique and require special
attention. Items fall in this category when (1) demand is nonrepetitive and occurs at infrequent intervals
or (2) an uncertain demand exists for a short-lived item. The first situation is typified by promotial, fad,
or seasonal items ordered by retail outlets; occasionally needed spare parts for maintenance; and
materials required in the construction of special projects. The second situation is typified bThe second
situation is typified b highly perishable items (fresh fish, flowers) or short-lived, obsolescent items
(Christmas trees, newspaper, periodicals).

Material Requirement Planning Inventory System

For items that exhibit a discrete and dependent demand, classical systems are less desirable. These
items are more appropriately controlled under a material requirement planning (MRP) system. This
system does not try to make inventory items are available at all times. It plans inventory lot sizes so they
are time phased to when they are needed. Inventory levels can be lower, and holding costs reduced
substantially. Time phasing is the essential ingredient of an MRP system. Time phasing requires known
future requirement and sufficient time to react (lead time). Sufficient time to react is another vital
ingredient for an MRP inventory system. Lead times must be established for every material order,
fabrication, subassembly, and assembly. If a sufficient item horizon exists, it is possible to start without
any inventory for and end items and purchase exactly what is needed, fabricate just those components
needed, and assemble the precise requirements with no surpluses or shortages. MRP is a backward
scheduling system that starts with the finished product. It then works back to the raw materials, through
all levels of subassembly and fabrication. Its goal is to plan inventory so it is available when needed (not
before not after).

Just-In-Time Inventory System

The Just-In-Time (JIT) inventory system, developed by the Japanese, is used in repetitive manufacturing.
It controls raw material and in-process inventory levels for dependent demand items. It logistically links
work centers so there is an even flow of materials similar to that found in an assembly line. It attempts
to drive all queues toward zero and achieve an ideal lot size of one unit.

Theory of Constraints Inventory System

The theory of constraints (TOC), also known as synchronous manufacturing, is a continual improvement
philosophy that focuses on operational constraint. It postulates that there are identifiable constraints
associated with the operation of any organization and that management should exercise control by
identifying and effectively managing them. A constraint is defined as anything that prevents a system
from achieving a higher performance relative to its goals. Nonconstraint resources are subjugated to
constraint requirements to attain optimal utilization of the constraint. Time buffers of inventory are
located at constraint to ensure 100% utilization. Transfer lot sizes that are frequently smaller than
process lot sizes are used to overlap operations and synchronize the product flow rate.

Selective Inventory Control

Selective inventory control can indicate where the manager should concentrate efforts. It is usually
economical to purchase a large supply of low cost items and maintain little control over them.
Conversely, small quantities of expensive items are purchased, and tight control should be exercised
over them. It is frequently advantageous to divide inventories into three classes according to dollar
volume (the product of annual quantity and the unit purchase cost or production cost). This approach is
called ABC analysis. The A class is high value items whose dollar volume typically accounts for 75-80% of
the value of the total inventory, while representing only 15-20% of the inventory items. The B class is
lesser value items whose dollar volume accounts for 10-15% of the inventory, while representing 20-
25% of the inventory items. The C class is low value items whose volume accounts for 5-10% of the
inventory value but 60-65% of the inventory items. The major concern of an ABC classification is to
direct attention to those inventory items that represent the largest annual expenditures. If inventory
levels can be reduced for class A items. It will result in a significant reduction in inventory investment.
The purpose of classifying items into groups is thus to establish appropriate levels of control over each
item. The ABC analysis is useful for any type of independent demand system (perpetual, periodic,
optional replenishment, and so forth).

Before items can be classified, factors other than financial ones must be evaluated. Additional
considerations can drastically change an items classification as well as its control procedure. Some
important factors might be:

1. A difficult procurement problem (long and erratic lead time),

2. The likelihood of theft,
3. A difficult forecasting problem (large changes in demand),
4. A short shelf life (due to deterioration and obsolescence),
5. A large storage space requirement (very bulky),
6. The items operational criticality.

Inventory System Development

The ultimate success of an inventory system depends on turning inventory theory into workable detailed
procedures. Any inventory system require the collection and processing of vast quantities of data. The
design of forms and procedure can be as important as precise quantitative accuracy.

The foundations of any inventory control system are input data and control records, which must be
current and accurate. Poor records and data can destroy a perfectly designed control system. Accurate
and up-to-date data records permit an inventory system to function efficiently and effectively.

The design of inventory system must include sufficient flexibility to permit growth, expansion, and
internal change without upsetting the operational system. The system must be able to cope with the
exceptional item or event. The inventory system should be capable of being integrated into the other
organizational systems with little difficulty.

Inventory System Improvement

There are many ways an inventory manager can make improvements and increase performance. Some
apparent methods would be

1. Standardize stock items

 2. Reduce lead time
3. Reduce cycle time
4. Use fewer suppliers
5. Inform supplier of expected annual demand
6. Contract with suppliers for minimum annual purchases
7. Buy on consignment, arrange with suppliers to pay for their items as they are sold or used
8. Consider transportation costs
9. Order economical quantities
10. Control access to storage areas
11. Obtain better forecasts
12. Dispose of excess stock
13. Improve record accuracy
14. Improve capacity planning
15. Minimize setup time
16. Simplify product structures
17. Consider multishift operations
18. Focus on continuous improvement

In-Process Inventory

The level of work-in-process (WIP) inventory is determined by the amount of work released to the shop
and the output rate from it. To reduce WIP, reduce the number of orders released to the shop, decrease
the throughout time (lead time), or increase the capacity of critical (overloaded or bottleneck) work
centers. The majority of WIP is represented by work waiting in queues; the time spent in such queues
usually amounts to 80-90% of the manufacturing cycle time. If queues can be shortened, WIP and lead
time can be correspondingly reduced.

Lead Time Reduction

The ultimate goal of a comprehensive lead time reduction strategy is not merely to cut the amount of
total lead time but to increase the speed of throughput. This is congruent with the philosophy
underlying the theory of constraint, which increases throughput by first identifying the most critical
bottlenecks in the system. Bottlenecks are the systematically and sequentially optimized to maximize
the system throughput. Ideally, a system relieved of bottlenecks will increase throughput and lead the
firm to seek new markets (by pursuing new market segments or new uses for the product), which
increases demand. The increased demand placed on the system will ultimately locate new bottlenecks,
which leads to new opportunity for system optimization, which leads to increased throughput, and the
process continues. Lead time reduction strategies fit within the general continuous improvement
framework.