1. A system to keep track of the inventory on hand and on order.

• Inventory counting systems can be:

a. Periodic system – a physical count of items in inventory is made

at periodic, fixed intervals (e.g. weekly, monthly) in order to decide
how much to order of each item. Used by many small retailers.

* advantage
– orders for many items occur at the same time, which can result
in economies in processing and shipping orders
* disadvantages
– lack of control between review
– the need to protect against shortages between review periods
by carrying extra stock
b. Perpetual inventory system (continuous review system) –
keeps track removals from inventory on a continuous basis, so
the system can provide information on the current level for
each item.

* advantages
– control provided by the continuous monitoring of inventory
withdrawals
– with the fixed order quantity, management can determine
an optimal order quantity
* disadvantages
– added cost of record keeping
– physical count of inventory must still be performed
periodically to verify records because of periodic errors,
pilferage, spoilage, and other factors that can reduce the
effective amount of inventory
* Examples of perpetual inventory system

– Bank transactions such as customer deposits and withdrawals

– Two-bin system – two containers of inventory; reorder when the

first is empty

– Universal product code (UPC) – bar code printed on a label that

has information about the item to which it is attached

– Point-of-sale (POS) system – electronically record items at time

of sale

– Radio frequency identification (RFID) tags – provide real time

information that increases the ability to track and process shipping
containers, parts in warehouses, items on supermarket shelves, etc.
These include tags used in “speed passes” for toll roads.
2. A reliable forecast of demand that includes an indication of
possible forecast error.

• It is essential to have reliable estimates of the amount and

timing of demand because inventories are used to satisfy
demand requirements.

3. Knowledge of lead times and lead time variability.

• Lead time is the time interval between ordering and receiving

the order.

• Managers need to know the lead time and the extent to which
it might vary since the greater the potential for variability, the
greater the need for additional stock to reduce the risk of
shortage between deliveries.
4. Reasonable estimates of inventory costs.

• Four basic costs associated with inventories:

a. Purchase cost – the amount paid to buy the inventory

b. Holding (carrying) cost – cost to carry an item in inventory for a length of

time, usually a year. It includes interest, insurance, taxes, depreciation,
obsolescence, deterioration, spoilage, pilferage, breakage, tracking, picking
and warehousing costs.

c. Ordering cost- cost of ordering and receiving inventory

d. Shortage cost- costs resulting when demand exceeds the supply of

inventory

5. A classification system for inventory items.