Inventoriesmodel can be extended to deal with most factors that the simpler version ignores.
Several of the references at the end of this chapter go into some of the sophistications
that can be incorporated. The model may also be used with a little adaptation for WIP
and finished inventories as well as for bought-in raw materials.Some practical points on management of inventories
Optimum order quantities
These should be established for each item of inventories, using either the model that
we derived (above) or some more sophisticated version. These quantities should be
periodically revised, but between revisions should be regarded as the size of order
that should be placed, except in most unusual circumstances.Inventories reorder levels
The level of inventories at which the next order must be placed should also be estab-
lished and adhered to. The actual level for a particular inventories item largely
depends upon the lead time (that is, how long it takes between placing the order and
the inventories actually arriving at the business’s premises) and the rate of usage of
inventories. One way or another, the order should be placed early enough for the
inventories to arrive just as the safety level is expected to be reached. This is depicted
in Figure 13.6.
To illustrate this, let us assume that, in the economic order quantity example
(above), the lead time is three weeks. As the weekly usage is about 20 units (that is,
1,000/52), if the order is placed when the inventories level drops to about 60 units
and all goes according to plan, the new inventories will arrive just as existing ones are
running out. This, of course, leaves no safety margin, but as we have already seen,
such devices can easily be incorporated. Such a safety margin is represented by a
‘buffer’ – a level below which inventories should not normally fall.
Most computer packages dealing with inventories records have a facility for incor-
porating reorder levels for each inventories item so that the computer’s output will
draw attention to the need to place the next order.Budgeting and planning
Much of successful inventories management is concerned with knowing what to
expect in terms of levels of demand for and costs associated with inventories. The
importance, in cost and risk reduction, of forward planning and budgeting probably
cannot be overestimated.Reliable inventories records
Unless businesses know what they have in inventories, their management becomes
very difficult. It is rarely possible in practice to gain sufficient information on invent-
ories from physical observation.Ratios
Ratios can be useful in managing inventories, particularly the inventories holding period
ratio (average inventories ×365/annual inventories usage), which indicates the aver-
age period, in days, for which inventories are held. The inputs for calculating the ratio