Inventory planning system is the process of determining the optimal quantity of inventory along with the timing of the product delivery. All the organizations which are involved in the sale, production and trade of goods hold inventory in one form or another. On one side, where a manufacturing organization might be involved in holding raw materials, spare parts and finished products as inventories, the companies involved in trading may deal in holding only finished goods in their inventories.
Traditional inventory management approach consists of two models namely:
In the inventories, which handle raw materials the inventory planning system essentially deals with two major functions. These two functions are inventory tracking and inventory planning. The job of inventory planning majorly deals with the job of analysis of demand and taking decisions about the timing and quantity of order. There are three main models in a traditional inventory management system, these are:
• EOQ - Economic Order Quantity
• Continuous Ordering
• Periodic Ordering
EOQ (Economic Order Quantity) is a method used to determine the order quantity which will minimize the total inventory costs. EOQ is the most basic model and forms the base for development of advanced models like Production Quantity Model and Quantity Discount model.
Continuous Order Model is a model which works on the fixed quantity of inventory level. The fixed quantity forms the basis of this model. As soon as the quantity in the inventory comes below the safety level, a trigger is generated to signal re-ordering of raw materials.
Periodic System Model: This model deals with periodic ordering of raw materials on fixed times.
The advantages of inventory planning system includes:
• Improved cash flow
• Higher profits
• Limits abuse
Hence, this concludes the definition of Inventory Planning System along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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