Question

Distinguish between fixed order quantity and fixed time period system and give an example of each.

Explain the ABC inventory classification system and indicate its advantages.

Please include source

Answer 1

The P and Q inventory system or a fixed time period(P) and fixed quantity(Q).

P system

The P system is based on period monitoring for the inventory requirement and is a fixed time interval process. It requires less oversight than a Q system since orders need to be made based on a fixed period. It requires more safety stock, and the chances of stockout are more than using a Q system.

Eg. A retailer orders a particular product form its manufacturer as soon as the product reaches a certain level in their inventory.

Q system

The Q system is based on setting a fixed inventory quantity and continuously monitoring the inventory nearing the threshold quantity to call for a reorder. It requires newer safety stock since the inventory is ordered upon the amount set and protects against a stockout in most cases. The cost incurred in monitoring the inventory is high.

E.g., for a retailer, the best approach is to order multiple products from different locations and manufacturers in their inventory, they have selected to order the inventory based on their demand, safety stock and period approach of one every two weeks. It allows them to save cost since they do not have to monitor multiple items in the inventory constantly.

2.

ABC INVENTORY

In an ABC inventory system, the inventory is classified utilizing their contribution to the dollar value and their inventory quantity value.

Item A has a low inventory value but a high dollar value contribution.

Item B has a medium inventory and dollar value contribution.

Item C has a high inventory value and low dollar value contribution.

The main advantages of the ABC classification system are:

1. Easy to classify inventory.
2. Provides a better overview of the inventory items which are more relevant to plan and manage.
3. Can give a company a better understanding of their market and services, build upon better processes and use the most favorable outcome.
4. It is cost effective since the cost and order quantities are mostly known to a company.

The entire inventory is classified based on this classification system.