The strategy of inventory control is a combination of rules according to which is made the decision to replenish the inventory stocks minding the time and the necessary volume of inventories to be ordered. Together with the description of conditions and restrictions of the inventory control process, the strategy transforms into an inventory control model for representation of which the following three forms can be used, while each of them includes all the elements of the previous starting from the second.
theoretical (conceptual) model contains text, pictures and logic diagrams for explaining the terms and principles of inventory control system’s functioning (Ziplin, 2000, Sprancmanis, 2011, Praude, 2013);
analytical (purely mathematical) model contains formulas for calculations (reckoned to be optimum at some point) of time moments and the volumes of purchase orders (Gringlazs, 2005, Tersine, 1994);
simulation (computer) model that also refers to the class of mathematical models and is intended for the research of inventory control system’s functioning dynamics in actual terms,
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or in conditions set in the framework of the simulation model by the researcher. (Law and Kelton, 2004)
Signs and factors that determining the variety of inventory control systems on the stage of their conceptual modelling will be considered below.
Character of the processes. The model, which has at least one probability parameter (demand, delivery time, etc.) is statistically distributed, or otherwise – determined. Most of the interest to researchers lies in the statistically distributed model as maximally approximated to real cases.
The number of nomenclatures. Models can be single product if they operate with only one type of inventory stocks, and they can be diversified if they operate with more than one type of inventory stocks.
Safety stock. A number of models allows for the safety stock in case of inability of basic alternating stock to meet the demand.
Deficit. Inventory control allows for deficit when there are not enough inventory stocks to meet the demand until the next delivery, but cases when deficit is not permissible are also possible.
Dynamic pricing. Recently models with one optimization parameter acting as a price for single product unit have become popular, which allows to influence the volume of demand.
Supply chains. In inventory control systems, there are some cases possible when inventory stock is supplied not directly from the manufacturer, but through intermediary, who has its own stocking strategy that differs from the manufacturer’s plans for products sales.
Limitations. Introduction of limitation on the model’s factors significantly influences the inventory control strategy. The presence of such limitations is related to the particularities of the transported cargo and goods, delivery methods, manufacturing manner, and terms of supply agreements. Among the limitations are distinguished:
o Limitations on storage space can appear when storing bulky goods or in case of deficit of warehouse space. In this case, mathematical model should focus on the formation of short-period orders with less volume.
o Limitations on the storage appear in cases, when the supplier delivers perishable goods and characteristics of goods delay become primary. This problem can be
31 treated with the problem of supply route choice, when several routes exist with different duration of transportation.
Products return for processing. This factor presents in the models related to the manufacturing in cases when backflow of used products exists, which can be processed and used for the manufacturing of new products.
Repurchasing of excess stock. This particularity is characteristic of inventory control models that are connected with military technologies, when one of the requirements is the compulsory repurchase of unused stock by the supplier.
Table1.1 shows some other evident signs and factors that need no additional explanations.
Table 1.1 Classification of inventory control models (Law and Kelton, 2004)
Signs Model Types
Number of nomenclatures Mononomenclative model Diversified model
Supply chains Supply model without intermediaries Supply model with intermediaries
Demand Determined
Random
Delivery time Determined
Random
Deficit Models that do not allow the deficit
Models that allow the deficit
Safety stock Model without the safety stock
Model with the safety stock Selling price Models with fixed selling price
Models with dynamic selling price Discounts Models that take discounts into account
Models that do not take discounts into account
Limitations on storage space Models without limitations on inventory storage space Models with limitations on inventory storage space Limitation on storage time Models without limitations on inventory storage time
Models with limitations on inventory storage time Limitation on the volume or
weight of ordered replenishment
Models without limitations on the volume of ordered consignment
Models with limitations on the volume of ordered consignment The costs of stock Models that do not take into account the costs of stock
Models that take into account the costs of stock Products return for
processing
Models with products return for processing Models without products return for processing Repurchasing of excess stock Models without repurchasing of excess stock
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The time of ordering Periodically, through certain time slot
Provided that the necessary level has been reached by the inventory stocks
Periodically, provided that the necessary level has been reached by the inventory stocks
Order volume Fixed order
Order up to a certain level
On Fig. 1.2 the relation between the levels of stock traditionally examined in the models. Maximum desired stock determines the level of inventory stocks, and is economically expedient in the given inventory control system. In many inventory control systems, this quantity is used as a reference point when calculating the volume of the supply.
Reorder point (threshold level of stock) is a quantity that indicates the current inventory level, and it shows the need in forming and placing the order for replenishment.
Safety (warranty) stock is aimed at reducing the risks level related to the unforeseen fluctuations of demand for the finished products, non-performance of contractual obligations to deliver material resources, failures on the logistics cycles and other circumstances.
Current stock corresponds to the stock level at any inventory moment and is aimed at ensuring the continuous production process or marketing between the next two supplies.
33 Each inventory control system is designed with the purpose of continuous delivery of certain type of material resources to the consumer. Implementation of such goal is reached through the following tasks:
setting the level of maximum desired stock;
determining the level of safety (warranty) stock;
organizing the inventory of the current stock level;
defining the time moment of orders formation;
calculating the size of the orders.
The optimum inventory control means that this type of control corresponds to a certain criterion (rule) of optimality. The simplest model is the formula for the optimal size of the order published in Wilson’s works in 1934 (Muckstadt, 2010), but only in certain cases it turns out to be useful for the decision-making in inventory control on the real enterprise. The inventory control optimization criterion on a certain enterprise should best match its highest economic goals and aspirations. The most complete optimization is possible on the delivery process’s financial model, which considers the purchasing organizational expenditures, transportation expenditures, warehousing and storage, the costs of building and equipment rental, and personnel expenditures.