Industrial EngineeringMechanical Engineering

Inventory Models

Economic lot size of an item depends on the following:

(i) Possibility of placing repeat orders.
(ii) Nature of demand
(iii) Availability of discount
(iv) 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.

1. 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:
(i) Single product (item) inventory models.
(ii) 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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