How do you choose the best inventory model for your system?

1 Demand patterns

One of the first factors to consider is the demand pattern of your products or services. Demand patterns can be classified as deterministic or stochastic, depending on whether they are predictable or random. Deterministic demand patterns are usually based on historical data, contracts, or forecasts, and they allow you to plan your inventory levels with certainty. Stochastic demand patterns are influenced by factors such as seasonality, trends, or fluctuations, and they require you to account for variability and uncertainty in your inventory planning. Depending on your demand pattern, you may need a different inventory model to balance the trade-off between holding too much or too little inventory.

2 Lead times

Another factor to consider is the lead time of your suppliers or processes. Lead time is the time it takes from placing an order to receiving the inventory. Lead times can also be deterministic or stochastic, depending on whether they are fixed or variable. Deterministic lead times are usually based on agreements, standards, or schedules, and they allow you to coordinate your ordering and replenishment policies with confidence. Stochastic lead times are affected by factors such as delays, disruptions, or quality issues, and they require you to incorporate safety stock and buffer inventory in your inventory planning. Depending on your lead time, you may need a different inventory model to minimize the risk of stockouts or excess inventory.

3 Inventory costs

A third factor to consider is the inventory cost of your products or services. Inventory costs are the expenses associated with holding, ordering, and managing inventory. Inventory costs can be divided into three categories: holding costs, ordering costs, and shortage costs. Holding costs are the costs of storing, insuring, and maintaining inventory, such as rent, utilities, depreciation, or obsolescence. Ordering costs are the costs of placing, processing, and receiving orders, such as transportation, labor, or administration. Shortage costs are the costs of losing sales, customers, or reputation due to insufficient inventory, such as lost revenue, penalties, or goodwill. Depending on your inventory costs, you may need a different inventory model to optimize your total inventory cost.

4 Inventory models

When deciding which inventory model to choose, you should consider a variety of factors. The most common types of inventory models are the economic order quantity (EOQ) model, the reorder point (ROP) model, the periodic review (PR) model, and the base stock (BS) model. Each model has its own advantages and disadvantages, and you may need to adapt or combine them to fit your system's characteristics and objectives. By selecting the right inventory model for your system, you can optimize your capacity planning and enhance your operational performance.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?