Inventory Models
Economic lot size of an item depends on the following:
- Possibility of placing repeat orders.
- Nature of demand
- Availability of discount
- Single or multiple product manufacturer.
Inventory models considering the above can be classified as under:
A. Static Inventory Models: It is applicable in case where only one order can be placed to meet the demand. Repeat orders are either impossible or too expensive. Typical examples of items under this group are: perishable goods like bread, vegetables etc., seasonal products like coolers, umbrellas, crackers, sweaters, rain coats etc.
B. Dynamic Inventory Models: It is applicable for items where repeat orders can be placed to replenish stock. Dynamic inventory models can be classified as:
- Deterministic models.
- Probabilistic models.
C. Deterministic Models: These are based on the assumption that the demand as well as lead time of an item are deterministic (i.e., known with certainty). Further, these models may be classified as:
- Single product (item) inventory models.
- Multi product inventory models.
The single product deterministic inventory models may be classified as:
(a) Deterministic inventory models with no shortages:
- Inventory models with uniform demand.
- Inventory models with several production runs of unequal length.
- Inventory models with finite replenishment (Production).
(b) Inventory models with shortages:
- Inventory models with instantaneous production and variable order cycle.
- Inventory models with instantaneous production and fixed order cycle.
- Inventory models with finite replenishment (Production).
(c) Inventory models when quantity discount is allowed:
- With one price break.
- More than one price break.
Assumptions in Deterministic Models:
The following assumptions are made in deterministic models:
- The demand of an item is known exactly for a given period.
- The demand of an item occurs uniformly over a period of time.
- The cost of placing an order is fixed and does not vary with the lot size. Similarly, set up costs are also constant.
- The inventory carrying charges are directly proportional to the order quantity.
- The price per unit is fixed and is independent of the order size (in case of fixed price inventory models).
- Orders are received instantaneously (Replenishment is instantaneous).
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