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Inventory Control Methods
Moises Garcia Jr.
William Rainey Harper College

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Inventory Control Methods
Manufacturing companies have to solve specific problems in the field of management. To
solve these problems the world practice has developed a number of methods. Like for most other
businesses, the main objective for industrial enterprises is to earn money. Basic parameters that
characterize the degree of success of the enterprise on the way to the designated target are
turnover and reserves. Turnover is the frequency with which the company generates money
through sales of products and the amount of relevant implementation. Reserves are the money
spent on system objects that the system intends to turn into throughput. The value of turnover is
not the main indicator of a well-functioning business. It is important to determine how much
does it cost the organization to generate profit i.e. to evaluate the return on investment. The
turnover cannot be considered satisfactory if the return on investment is low, that is, when a
number of stock or money that is drowning in the system is large. Thus, reserves are not only
real accumulated volumes of material, components, work in process, or finished products, but
also buildings, structures, equipment, and certain categories of staff. However, to improve
manufacturing operations the focus should be on real stock.
Operating expenses are the money that the system spends to transform stocks in
throughput. These include all costs that accounting considers to be permanent and most variable
costs, such as salaries of industrial workers, etc. In order to be profitable, the company must
generate a profit that would cover all operating expenses. In order to maximize revenue, this
model requires simultaneous optimization of three parameters, namely an increase in turnover,
reduction in operating costs, and reduction of inventories. Industrial enterprise can achieve this
by effectively meeting external demand on time in the right volume, by providing high quality
goods (increasing turnover), reducing the time of production (factor increase turnover, reduce
inventories, in particular work in progress); reducing stock of materials, parts, work in process,

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finished product (factor stocks) reduce operating costs i.e. to reduce direct and indirect costs (a
factor of operating expenses). This can be achieved by choosing an optimal method (and the
corresponding information system) of production planning and control. There are different
methods of planning for industrial enterprises, each having its own strengths and weaknesses.
Order Point Control
When using the method of planning and management at the point of order (there is also
an option to use a method "for reorder point"), the company creates job places if the amount of
its stock falls in a certain predetermined minimum level. The main advantage of this method is
its simplicity (Dear, 1988). Planning and management at the point of order can be used for
inventory management category C (ABC classification) i.e. relatively inexpensive products or
materials. The disadvantage is the lack of flexibility in terms of work. Another disadvantage is
that often custom-changing demand on management point of order does not give satisfactory
results.
Kanban Method
Under certain conditions (presence of partnerships with suppliers and customers, mass
production, and the organization of production lines, low cost of changeover to reduce the size of
the manufactured batch, etc.) the method of Toyota, or Kanban, can provide excellent results. It
is a part of "just in time» (JIT) management methodology. The purpose of the method is to use
simple physical signals (cards, empty containers, or light signals) which signal release of
materials from the warehouse, start of the production, or shipment of products to the consumer.
The basic idea of Kanban is very simple (Anderson, 2010). Imagine non-computerized work
area, where components necessary for production are stored in two containers. When one of the
containers becomes empty, the details are delivered from the second container. At this time, the
empty container is being refilled. Thus, the empty container in the production area is the signal to
start replenishing stock. Unlike in the case of computer control reorder point, the minimum stock

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level is not determined by the computer. It is determined visually by the storekeeper (manager)
of shop or a warehouse.
MRP Method
The method of MRP (Material Requirements Planning) includes a number of standard
steps. The first step is calculation of net needs of the content data based on the composition of
products (sheets). This includes estimating the number of necessary materials, sub-assemblies,
and components available or in progress. The second step is calculation of time for net material
requirements on the basis of the composition of the product. At this stage, the necessary amount
is calculated taking into account all income and expenditures on materials. If the system detects a
reduction of material below a certain level, the amount to purchase or produce to meet the
demand should be determined. The third step is to determine timing of purchases and production.
At this stage of planning, logistics system determines the start date of action to implement the
calculated net needs. MRP algorithm uses a date of final requirements as a start and "spins" back
in time the process of manufacturing the product or purchase of materials, determining the date
of commencement of production operations with components (parts) of the lower level to
determine the dates of formation of orders to suppliers (Bukaczyk, 2012). One of the features of
the method (as compared to control by reorder point) is that the MRP does not imply the
possibility of lacking necessary materials in the warehouse. All deliveries of parts and materials
are made exactly on time if all input data and planning procedures are performed correctly and
all deviations are taken into account in the implementation of the plan in a timely manner. In
addition, MRP method does not "look" in the past: the amount of necessary materials is
calculated on the basis of gathering information about future needs and expected levels of
inventory in warehouses. The advantage of this method is the ability to take into account future
needs of the enterprise and to create orders for replenishment of stocks at the right time and in

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the right quantities. Lack of MRP is the inability to take into account limited resources of the
enterprise.
MRP II Management Method
Manufacturing Resource Planning (MRP) method of production control and inventory
management is the most widely used. The corresponding algorithm includes the following steps.
First, the demand for finished products should be determined, taking into account all parameters
of demand, namely customer orders, demand forecasting, replenishment requests to remote
databases and distribution warehouses, prediction of the need for spare parts, etc. On the basis of
this information, the main production plan is formed. The algorithm of creating the plan is nontrivial and depends on the way of satisfaction of external demand: through the production of the
warehouse /made to order, assemble to order, or custom design. Based on the information about
the main production plan and the presence of product specifications, the requirements for
materials, components, and intermediate assemblies are defined. The size of the demand for
manufactured and purchased parts as well as the time are determined if there is available
information on stocks (work in progress, inventories of materials and components, materials in
transit). The advantage of this method is the possibility to create precise plans, procurement, and
production. This method of planning will work perfectly even in unstable internal and external
environment. For example, it is possible to compensate for factors such as interruption in supply
of materials and components (in time and quantity), unstable operating equipment, and changes
in external demand (e.g. failure of customer's order). The disadvantage is its relative complexity.
The logic of MRP II algorithm is based on conducting multiple computing, which implies
presence of the developed information system class, MRP II, or ERP. Furthermore, it implies
high demand for accuracy of information about the condition of the enterprise supplied to the
system. Thus, a number of available stocks should be evaluated with an accuracy of less than

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95%. The same precision is required in planning for production orders and purchase orders, in
determining specifications and process flows, etc.
APS: Synchronized Planning Method
Advanced Planning and Scheduling (APS) is one of the newest achievements of Western
thought in the field of production management and inventory management. It is believed that this
technique, which appeared around 1995, eventually will replace MRP II control method (Van
Eck, 2003). It should be noted that it is mainly applicable to enterprises that are focused on
meeting external demand order. Structurally, this method can be divided into two parts: the first
is connected to planning of production and supply, and the second to scheduling of production.
The algorithm of the first part is similar to the algorithm of MRP II. There is, however, a small
but significant difference. Scheduling algorithm MRP II, as it was already mentioned, is
performed by a recursive pattern: a plan to purchase or manufacture required products at the rate
of infinite resources, estimated resources, in the case of non-available resource capacity, and
planned load carried rescheduling the date of start of production with the ultimate power. Then,
because the date has changed, rescheduling of purchases or production is made, which is again
based on infinite resources; then steps 2, 3, etc are repeated.
This process takes considerable amount of time. However, usually it cannot be performed
continuously (on a daily or weekly basis). While rescheduling, deviations from the plan might
not be taken into account, which can occur quite frequently in production. This point can be
neglected in a case of serial, relatively stable production. However, custom production as well as
highly competitive MRP II scheduling algorithm may provide poor results on timing of orders in
terms of accuracy and timeliness. The APS algorithm for calculating does not have these
drawbacks as for once expects necessary purchases given current (limited) capacity and
production tasks performed. In addition, by using a mathematical model of calculating, the plans

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are produced much faster - it takes only few minutes (as opposed to several hours using standard
systems MRP II). APS advantages of the method include the ability to obtain real plans based on
the modeling of the production process and the evaluation of various options by asking "whatif". In addition, the use of this method (and the corresponding information system) is possible in
real-time during a telephone conversation, to calculate the date of execution of customer orders,
taking into account the situation in the short-term enterprise. Disadvantages of the method are
obvious. First, its application requires the availability of a powerful ERP-system, which supports
synchronous scheduling functions, which are closely integrated with other modules. Second,
requirement for accuracy of initial information is significantly increased.
The methods discussed above have been successfully used in various manufacturing
facilities around the world. Availability of different methods of inventory control in
manufacturing and their differences point to a clear need for inventory management and its
development. Each method has its advantages and disadvantages, and each of them are
absolutely justified by a variety of approaches to production and supply of material for each
individual enterprise. Each company can test and integrate the most appropriate method and can
even create a unique one based on the international experience in inventory management.
References
Anderson, D. J. (2010). The principles of the Kanban method. David J. Anderson. Retrieved
from http://agilemanagement.net/index.php/Blog/the_principles_of_the_kanban_method/
Bukaczykl, N. (2012). Inventory control – what is MRP and why do we use it? Dataram.
Retrieved from http://www.dataram.com/blog/?p=107
Dear, A. (1998). Working towards just-in-time. Kogan Page Ltd. London.
Van Eck, M. (2003). Advanced planning and scheduling. BWI. Retrieved from http://www.
obp.math.vu.nl/logistics/papers/vaneck.doc