Inventory Planning: Core Concepts & Best Practices

Every organization that is engaged in production, sale or trading of Products holds inventory in one or the other form. While production and manufacturing organizations hold raw material inventories, finished goods and spare parts inventories, trading companies might hold only finished goods inventories depending upon the business model.

When in case of raw material inventory management function is essentially dealing with two major functions. First function deals with inventory planning and the second being inventory tracking. As inventory planners, their main job consists in analyzing demand and deciding when to order and how much to order new inventories. Traditional inventory management approach consists of two models namely:

• EOQ - Economic Order Quantity
• Continuous Ordering
• Periodic Ordering

1. EOQ: Economic Order Quantity method determines the optimal order quantity that will minimize the total inventory cost. EOQ is a basic model and further models developed based on this model include production Quantity Model and Quantity Discount Model.

2. Continuous Order Model: works on fixed order quantity basis where a trigger for fixed quantity replenishment is released whenever the inventory level reaches predetermined safety level and triggers re ordering.

3. Periodic System Model: This model works on the basis of placing order after a fixed period of time.

EOQ Model