Order cycling Definition: Order cycling is a periodic inventory replenishment method. It involves ordering inventory at regular intervals (e.g., weekly, monthly), regardless of current inventory levels. The goal is to bring stock levels back up to the predetermined maximum (max) level. 1. Min-Max Levels ● ● Min Level: The minimum level (safety stock) is the point at which new orders must be placed to avoid stockouts. Max Level: The maximum level is the highest amount of stock the company wants to maintain. Example: ● A company sets a minimum level of 100 units and a maximum level of 300 units for a spare part. If the current stock level is 120 units, during the next order cycle, 180 units would be ordered to reach the max level (300 units). 2. Two-Bin Method Definition: This is an inventory management system where stock is split into two bins. One bin is used to meet current demand, and the second is reserved for replenishment. ● ● Bin 1: Used for regular consumption. Bin 2: Acts as safety stock. When Bin 1 is empty, an order is placed, and Bin 2 is used to meet demand while the order is fulfilled. Example: ● A hardware store uses two bins for screws. Bin 1 has 200 screws, and when it runs out, an order for 200 screws is placed, and screws from Bin 2 are used in the meantime. Once the new stock arrives, Bin 1 is replenished and becomes the active bin again. 3. ABC Analysis Definition: ABC analysis is a method for categorizing inventory into three categories based on the value or importance. ● ● ● A-items: High-value items with low sales frequency (e.g., critical spare parts). B-items: Moderate value items with moderate sales frequency. C-items: Low-value items with high sales frequency. Example: ● ● A company sells three products: engines (A), filters (B), and nuts (C). ○ Engines make up 10% of inventory but 70% of total sales value (A). ○ Filters account for 20% of inventory and 20% of sales (B). ○ Nuts make up 70% of inventory but only 10% of sales (C). Based on ABC analysis, more focus would be placed on managing engines (A-items) because of their high value. 4. Economic Order Quantity (EOQ) Definition: EOQ is a formula used to determine the optimal order quantity that minimizes the total cost of ordering and holding inventory. It balances order costs with holding costs. ● Formula: Where: ● ● ● D = Annual demand S = Ordering cost per order H = Holding cost per unit per year Example: ● A company sells 10,000 units of a part annually. Each order costs $50, and the holding cost is $2 per unit per year. The EOQ would be calculated as: This means the company should order 707 units each time to minimize total costs. These inventory management methods aim to optimize stock levels, prevent stockouts, and reduce costs.
