1. FIXED ORDER QUANTITY
With fixed order quantities, inventory is replenished with a predetermined quantity of every stock every time the inventory falls to a specific order level. The reorder level is the quantity to be used during the lead replenishment time plus a reserve. This level can be calculated by using the formula:
Maximum usage X Maximum lead time
Thus, if the lead time is 25 to 30 days and the maximum usage in the lead time is 200 units, then
the re-order level will be: 200 X 30 = 6000 units
Reorder levels may be indicated by:
- Simple manual methods, such as the two bin-systems, which is that the stock of a particular item is kept in two bins and when the first bin is empty, a supply is reordered.
- Computerized systems, which trigger replacements when inventory has fallen to the specified reorder point-such systems usually, use bar-coding o record withdrawals from stock. The fixed quantity is, however based on an economic order quantity (EOQ).
2.ECONOMIC ORDER QUANTITY (EOQ)
As its name suggest, this concept holds that the appropriate quantity to order may be the one that tends to minimize all the costs associated with the order-carrying costs, acquisition costs, and the cost of the material itself. The economic order quantity is where the sum of inventory costs and ordering costs per unit is lowest. Ordering large quantities from suppliers has the advantage that the ordering costs (fixed costs) can be spread out over a larger number of products. Hence, larger the order quantities will lead to a lower order cost per unit. The disadvantage of ordering large quantities, however, is that larger quantities of the product must be kept in stock for a longer period of time, which naturally implies higher inventory carrying costs per product. There are factors that influence economic order quantity. They include: Costs of acquisition, holding costs, storage costs and cost of stock outs.
3.PERIODIC REVIEW SYSTEM
Periodic inventory review involves counting and documenting inventory at specified times. For example, a retail store operating under a periodic review policy might count inventory at the end of each month. Continuous inventory review, also known as perpetual review, involves a system that tracks each item and updates inventory counts each time an item is removed from inventory.
For example, a retailer may use bar code scanners to record customer purchases and update inventory counts every time a cashier scans a product code.
Advantages and Disadvantages of Periodic Inventory Review
Periodic inventory review reduces the time a business owner or manager spends analyzing inventory counts, which allows more time for other aspects of running the business. However, it may not provide accurate inventory counts for businesses with high-volume sales. The owner or manager must make assumptions between inventory review periods regarding inventory counts. This can make it difficult to ascertain when reordering an item is necessary. It also can make accounting less accurate.
4. PERPETUAL INVENTORY REVIEW
In business and accounting, perpetual inventory or continuous inventory describes systems of inventory where information on inventory quantity and availability is updated on a continuous basis as a function of doing business. Generally, this is accomplished by connecting the inventory system with order entry and in retail the point of sale system. In this case, book inventory would be exactly the same as, or almost the same, as the real inventory.
The system is aptly termed perpetual because the account inventory is continually adjusted for each change in inventory, whether it’s caused by a purchase, a sale, or a return of merchandise by the company to its supplier (a purchase return for the buyer, a sales return for the seller). The cost of goods sold account, along with the inventory account, is adjusted each time goods are sold or are returned by a customer.
Advantages and Disadvantages of Perpetual Inventory Review
Perpetual inventory review permits real-time updates of inventory counts, which can make it easier to know when to reorder items to replenish inventory. This method of inventory review also facilitates accurate accounting, since the inventory system can generate real-time costs of goods sold. The main disadvantage of this type of inventory review is the cost of implementation — bar code scanners, inventory software and computer systems are all necessary to maintain perpetual inventory review. Perpetual inventory systems can still be vulnerable to errors due to overstatements (phantom inventory) or understatements (missing inventory) that can occur as a result of theft, breakage, scanning errors or untracked inventory movements, leading to systematic errors in replenishment.