Explain the three inventory control models and the driving factor in each model. Provide examples for each one using current companies.
Inventory control is critical to running an efficient business operation. With proper inventory control businesses can ensure that they have proper inventory levels to meet demand. By being fully stocked during peak demand periods, businesses are better able to increase revenue and profitability. The three inventory control models heavily utilized in the industry are the Economic Order Quantity model, the Activity Based Costing Model, and the Just-In-Time model (Agin, 1996).
Economic Order Quantity is the most widely used inventory control model. This method allows companies to order precisely the proper amount of inventory to meet demand. This method allows businesses to improve inventory levels without incurring large holding, insurance, and ordering costs associated with too much inventory. This method is used heavily by companies who have constant demand throughout the year with minimal variability. McDonalds is a classic example of the EOQ model at work as its business is very predictable and recession resistant. As it result, demand for its products are relatively stable throughout the year.
The activity-based costing model categories inventory levels by level of importance providing management with a clear view as to the metrics driving inventory changes for its most important items. Activity based costing is used as an inventory management tool that allocates cost specifically to objects that use the activity. This method often is used in complex and sophisticated work environments. For example, Coca Cola uses ABC costing to assign overhead and indirect costs to the production of its drink products.
The Just-in-time inventory control model uses the lowest inventory amount possible in order to minimize inventory costs and waste. In essence, the inventory management system looks to order inventory when a customer makes a product purchase. Just-in-time is used heavily in the construction industry for very fragile and expensive products such as windows. Here windows are easily broken, and as such, pose to the construction company if left in storage. Instead, the windows are ordered and installed once they are demanded by the customer to prevent damage occurring while in storage.
References
1. Agin, N. 1996. A min-max inventory model. Management Science (March): 517-529
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