Question

Explain the three inventory control models and the driving factor in each model. Provide examples for each one using current companies.  

Answer 1

The three basic inventory control models used are as follows:

a) Fixed Period model - P Model

b) Fixed order quantity model Q Model

c) ABC classification model

a) Fixed Period model - P Model

P model assumes that the period between the two subsequent orders remain fixed. The inventory order per order can vary. The most important thing is there must be a periodic inventory check to identify the current inventory level before placing an order.

This model is quite useful where the products/supplies ordered are perishable in nature as you will have to replenish the inventory very quickly in quick succession. e.g. milk, vegetables, newspaper suppliers. we can take an example of Newspaper agency.

b) Fixed order quantity model Q Model

In this model, the quantity ordered per order always remained fixed but the time period between two successive orders can vary. The lead time and based on it safety stock becomes crucial. It generally considers the annual demand, so more suitable for large corporations and where inventory can be stored relatively for longer period of time. We can take an example of any automobile or consumer durable companies like Ford or LG.

c) ABC classification model

ABC classification models differentiate the inventory items in to three categories namely A,B and C based on the value of the inventory. This model assumes that the inventory with higher value should have a tighter control. This model is quite useful for the companies with a large set of items with a very wide range of item values. The Wall Mart can be considered as an example for ABC classification model.