Inventory Control Models: Different Types and Applications

Understanding the basics of inventory control models and how they work is necessary for any business that carries an inventory. Whether you’re trying to improve cash flow, reduce stockouts, or minimize delivery times, you’ll need to improve your inventory management practices first.

In this guide, we’ll help you understand the different types of inventory control models you can use to achieve your inventory management goals.


What Are Inventory Control Models?

Inventory control models are the processes and tools that help businesses understand their inventory better and thereby optimize its management. While they can deliver many benefits, the main function of an inventory control model is to help businesses ensure they have an adequate supply of inventory without the risk of overstocks or stockouts.


Common Inventory Control Models

Common inventory control models are those that are widely applied across several industries. These models are sufficient for successful inventory management as long as the supply chain and demand are largely stable.

1. ABC Analysis

The ABC analysis categorizes inventory items based on their value or demand. Using the ABC model, businesses can identify which of their inventory items are of high or low value. They can then allocate their business resources accordingly to ensure maximum returns are generated.

ABC analysis is ideal for businesses with a wide range of products and a diverse customer base. However, the products must differ in value so that this model can be beneficial to a company.

2. Economic Order Quantity (EOQ)

The EOQ model helps businesses lower their total inventory costs by balancing the ordering and holding costs. It involves finding the optimal ordering quantity that allows a business to lock in minimum capital in its inventory without risking stockouts.

Note that the EOQ model only works for products that have a predictable or fixed demand and a reliable lead time. For example, office supplies like printer ink and paper.

3. Just-in-Time (JIT)

The JIT model is a unique system that focuses on ordering the amount of inventory needed. It gets rid of any excess inventory and helps reduce waste due to expired or obsolete products. If you’re looking to reduce your inventory holding costs, JIT should be at the top of your list. It is ideal for items with a high demand variability and short shelf life.

Executing the JIT model successfully requires a flexible network of suppliers and high-level coordination between suppliers, retailers, and distributors. In addition, you also need to get the reorder timing right or risk losing customers due to stockouts. JIT also requires a reliable production process because the model exposes the business to the risk of delays in case there are disruptions in the supply chain.

Due to the inherent risk of this model, it is used in combination with other inventory control models such as those used for demand forecasting.

4. Reorder Point Model

Also known as the fixed reorder quantity system, this model focuses on establishing an optimal reorder point. Whenever inventory levels reach this reorder point, an alert is raised and replenishment orders are placed.

The reorder point is set in such a way that available stocks last until new inventory arrives, ensuring there are no stockouts.

Similar to JIT, the reorder point model also helps businesses avoid having large amounts of funds tied up in standing inventory to improve cash flow. In addition, businesses can automate their replenishment processes since reorder levels are set for every product.

This model doesn’t work for complex manufacturing processes and constantly fluctuating markets. Plus, it requires constant re-evaluation in case of changes in the supply chain or demand.

5. Continuous Review Model

The continuous review model tracks inventory levels constantly. It is designed to help businesses that want to prevent stockouts, meet customer expectations, cut costs, utilize resources better, etc.

Under this structure, the business monitors factors like reorder points, order quantities, and lead times. They then consider these various aspects when making inventory decisions.

6. Periodic Review Model

Also known as the fixed reorder period model, the periodic review model is the opposite of a continuous review model. In a periodic review model, businesses only take stock of their inventory after a fixed period has passed. The business will decide whether more orders should be placed based on stock levels, demand forecast, etc.

This type of model is best suited for industries with unpredictable demand. However, you may also deploy this model in instances where there is little inventory to track or the cost of the inventory is high.

7. Multi-Echelon Inventory Optimization (MEIO)

MEIO addresses the needs of businesses that have a complex supply chain with multiple locations and stages. This model focuses on optimizing inventory across every stage of the supply chain.

Since it deals with a huge and complex network, MEIO heavily relies on accurate demand forecasting, critical data and insights, detailed information on lead times and costs, and an optimally structured supply chain. The system also utilizes several other models such as EOQ, reorder point, safety stock, ABC analysis, and more.

MEIO is commonly used in the retail, pharmaceutical, manufacturing, automotive, and electronics industries.

8. Materials Requirement Planning (MRP)

The MRP model for inventory management helps identify the amount of materials needed for production. It is ideal for businesses with complex production schedules. It ensures that necessary materials are available to keep production processes operating smoothly.


Uncommon Inventory Control Models

Uncommon inventory control models are used when a business might have too many unknown parameters or industries with unreliable supply chains. They’re primarily designed to address complex supply chain issues of large-scale businesses. Hence, these models also integrate inventory management with production and delivery processes.

These models often use a combination of inventory models along with sophisticated technologies and calculations to deliver accurate insights that help with decision-making.

1. Dynamic Lot-Sizing

Dynamic lot-sizing applies the EOQ principle with the added consideration that a product’s demand will vary over time. Similar to EOQ, this model helps determine an optimal order quantity.

It is ideal for businesses trying to optimize production efficiency while minimizing total production, ordering, and holding costs.

2. Base Stock Model

The base stock model incorporates the reorder point model. However, the purpose here is to cover demand during the lead time while maintaining the base stock. Because of this, the base stock model has a reorder point that’s a combination of the base stock level and the forecast demand during the lead time.

The base stock model works best for industries that have a predictable demand, a reliable supply chain, and stable lead times. It reduces stockouts and overstocks.

3. Service Level Optimization

The service level optimization model focuses on setting service-level targets for the inventory instead of safety stock targets. This is an approach for businesses that want to prioritize customer satisfaction. The model allows businesses to have stock ready to go when customers place an order so that the orders are fulfilled as promised. Plus, it also ensures inventory costs are as low as possible.

This model is often employed by retail and distribution industries where lead time accuracy is a key offering.

4. Network Inventory Model

A network inventory model is a special kind of inventory management system for organizing and managing network assets and configurations. Network inventory management involves tracking hardware and software assets, their locations, status, connections to other devices, etc.

The model is ideal for businesses that possess a complex network infrastructure or need to update it regularly.

5. Inventory Routing Model

Designed to help businesses achieve their order fulfillment goals, the inventory routing model optimizes inventory management, vehicle routing, and delivery scheduling in one go.

If you’re responsible for delivering products to multiple customers in a given region, this model helps optimize relevant parts of your operations while lowering distribution and production costs. With this type of model, every customer represents the maximum inventory level.

6. Stochastic Inventory

Businesses that must contend with several variables when reordering inventory can benefit from the stochastic inventory control model. This method helps businesses determine the replenishment order quantity and timing even when demand and other parameters are uncertain. It does this with the help of probability distributions and by defining maximum and minimum ranges for any unknown parameters.

Probability distributions reveal the possible inventory performance for each variable. With an idea of potential results, managers can easily evaluate trade-offs for each reorder point before making a decision.

Since the stochastic inventory model is used when parameters are unknown, it can be applied to any common inventory control model that fits the characteristics of the inventory.

7. Advanced Analytics and Machine Learning

Although a new strategy, advanced analytics and machine learning will soon be a common feature in inventory control models. It is particularly useful for environments where the market conditions are changing rapidly.

For starters, advanced data analytics alone can help businesses improve the accuracy of demand forecasting and supply. The best part is it can account for a range of parameters that traditional inventory control models cannot. Some of the insights delivered through advanced analytics can also be used by businesses to negotiate favorable terms or to optimize warehouse layouts.

Machine learning also plays a huge role in analyzing large datasets. However, it shines in automated decision-making processes that are driven by insights.

The latest technological solutions—such as inventory management systems—are already equipped with features that help streamline operations. And they’re designed to support small and large inventories. Nest Egg is one of the best examples of this.

What Is Nest Egg?

Nest Egg offers next-generation stock management solutions for a wide range of industries like retail, healthcare, logistics, and information technology. Aside from tracking stock levels and purchases, it also offers insights from collected data.

The cloud-based system ensures convenient access to inventory information whenever it’s needed and across different devices. Apart from being scalable, Nest Egg can also be integrated with barcode scanning systems to help business managers streamline and automate their inventory management.


Inventory Control Models: How To Select the Right One for Your Business

Selecting an inventory control model involves considering a range of factors such as your business goals and size, demand characteristics, customer expectations, cost structure, lead time, supply chain capabilities, etc. Regardless of your choice, keep in mind that your inventory management model should help you answer the following questions:

  • How much inventory do you need to order?
  • In which areas can you cut costs?
  • Which inventory is selling quickly?
  • Which inventory is increasing your holding costs?
  • How much deadstock are you carrying?

Of course, some businesses might need to apply a combination of inventory control models to achieve the desired results. For example, if you have fast-moving and slow-moving goods, you can use the JIT model for fast-moving goods and the EOQ model for slow-moving goods.

Ultimately, the right inventory control model will help you manage your stocks efficiently in the least amount of time. Also, it will generate the highest profits with the least amount of money.

Re-Evaluating Your Inventory Control Model

With an ever-evolving supply chain and frequently changing market conditions, it’s obvious that your inventory control model cannot stay the same forever.

While the evaluation frequency will differ for every industry, it’s a good practice to re-evaluate your model every quarter. If that isn’t possible, you can re-evaluate it whenever there’s a significant change in market conditions. To find the optimal re-evaluation schedule for your niche, assess factors like market dynamics, business growth, product lifespan, and seasonality.


Conclusion: Inventory Systems Should Serve Your Business Needs

There are plenty of inventory control models to suit different business needs. Companies with simple and predictable supply chains can look to the common inventory models we listed. Meanwhile, organizations with complex, unreliable, and uncertain supply networks should consider uncommon inventory models.

At the end of the day, your chosen inventory model should support your inventory objectives, the products you carry, and your operations. Learning about different inventory systems you can use will help you use the best model as your business evolves and grows.

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