Inventory Management

Inventory management is the planning, organizing and controlling procedures that are carried out in order to achieve a balance between the items that must be available to meet the requirements.

In case of inventory shortage, loss of customer, risk of stopping in production and loss of image may occur.

Inventory control systems are the ordering and monitoring methods used to control the quantity and timing of inventory transactions. Inventory control provides systematic methods regarding the time and quantity of supply and ensures that these are complied with.

Traditional inventory control systems can be examined under two groups as “continuous” and “periodic” review systems. However, there are several hybrid systems that use the features of both of these systems. Today, various production systems such as “material requirements planning” and “just in time” which are integrated with inventory
control systems have become widespread.

The most important aim of inventory management is to efficiently ensure quantity and timing of the inventory that is needed for operations of the enterprise.

• To be able to respond sudden and seasonal changes in demand.
• To provide protection against problems arising from suppliers.
• To provide stability in employment by stabilizing production.
• To be able to tolerate failures and postures that may occur in the system.
• To ensure that different products can be produced in the same facility.
• To take advantage of the price advantages by taking the materials into economic size parties.
• To protect the enterprise against price and delivery uncertainties such as strike, price changes and inflation.
• To have the desire of looking strong with an image of delivery from inventory.

If the inventory level is less than necessary, the business may face a depletion situation, which leads to consumer dissatisfaction and sales losses. On the other hand, the availability of excess inventory brings an additional cost to the enterprise.

The purpose of inventory control is to ensure that the material requirements are met at the “desired time”, at the “desired quantity”, at the “desired location” and at the “desired quality”.

The ultimate goal of inventory control is to increase the long-term profitability of the company’s investments.

• To meet the expectations of the customers and to increase the competitiveness of the company by keeping the inventory depletion at a certain and acceptable level.
• To ensure that the company maintains inventory in economic quantities by arranging the procurement procedures to minimize the costs of ordering and inventory.

This amount is calculated by considering the annual average demand amount, order expenses, and unit price. The order point is also determined by the level of safety stock, usage speed and the duration of the lead time.

In periodic review system, the inventory level is controlled at the beginning or end of predetermined time intervals. During this check, the available inventory level is compared with the predetermined order completion target.

Material Requirement Planning (MRP) is a system that regulates production plans for final product’s
production decisions, control of inventory levels of raw materials and parts, and programs of workshop
and assembly unit. MRP is a method that tries to find the most economical answer to the questions of
“when to order” and “how much to order” for dependent inventory items.

The basic principle of material requirement planning is to have the necessary parts and materials
backwards from the finished product with independent demand at the time they are needed.

• The demand rate for the product (D) is constant and uniform throughout the entire planning horizon.
• The order quantity (Q) is constant.
• The demand rate for the year is known and evenly spread throughout the year.

• The product price is constant for the entire planning period.
• The lead time is not fluctuating.
• The average inventory level is taken into account when calculating the cost of holding.
• The cost of ordering is constant and independent from order quantity.
• All the demand in the planning period must

Economic Order Quantity (EOQ) is one of the oldest classical production planning models. EOQ is the level of inventory that minimizes the total inventory holding costs and ordering costs.

The first introduction of the inventory models was made in 1915.

Inventory holding cost

Shortage cost

Order cost

Costs that occur when there is no inventory or when the stock is out of stock are called shortage costs. 

Customer demands are subsequently met or loss of sales occurs when the customer’s demand is not met. Both cases are negatively reflected in costs.