Determining the most effective type of inventory strategy is an essential element for the success of a business. Without an effective inventory strategy, the company may lose money because of shortages to inventory or an excess of inventory caused from ordering too many goods. A business owner must be educated on the different types of inventory strategies to help determine which system will be most advantageous to his unique business situation.
Just-in-Time Inventory Management (JIT)
Many managers have come to realize that keeping a large inventory on hand can be costly. With a Just-in-TIme inventory strategy, orders are placed only as needed to fill customer orders. Money is saved by reducing inventory holding costs. Small quantities of inventory are ordered as needed to produce products. A close eye must be kept on inventory levels at all times to avoid inventory shortages which would result in an inability to fill customer orders.
Economic Order Quantity (EOQ)
The Economic Order Quantity inventory strategy assumes that demand for a product will remain at a constant or near constant level. The goal is to minimize costs, including holding and ordering costs. This strategy also assumes that lead time for the receipt of orders will remain constant. No shortages are allowed with economic order quantity. They key to EOQ is selecting an order quantity that minimizes average inventory management cost and time, thus avoiding shortages or overages of inventory.
Material Requirements Planning (MRP)
Material Requirements Planning inventory strategy uses computer inventory systems to keep adequate inventory levels to ensure required materials are available when needed. This system can be helpful for companies with multiple product lines with a large raw materials inventory list. The major components of an MRP system are inventory status records, master production schedule and product structure records. MRP looks at the master production schedule and product structure records to determine inventory requirements while maintaining the lowest possible level of inventory.
The goal of an effective inventory strategy is to minimize inventory costs while keeping an adequate inventory level to meet customer demand while making a profit for the company. Considerations in choosing the correct inventory strategy involve an analysis of the cost of carrying inventory and the cost of purchasing inventory, An effective strategy will answer the questions of how much inventory to order and when to order it. A business owner must analyze the advantages and disadvantages of each strategy to determine which method will work best.