How do you manage inventory with operations research?

1 Inventory types and costs

Before applying OR to your inventory management, you need to understand the different types of inventory and the costs associated with them. Inventory can be classified into three main categories: raw materials, work-in-progress, and finished goods. Raw materials are the inputs that are used to produce the goods, work-in-progress are the goods that are partially completed, and finished goods are the goods that are ready for sale or delivery. Each type of inventory has different holding costs, such as storage, insurance, depreciation, and obsolescence. Additionally, there are other costs related to inventory, such as ordering costs, which are the costs of placing and receiving orders, and shortage costs, which are the costs of not having enough inventory to meet demand, such as lost sales, backorders, or penalties.

2 Inventory models and methods

One of the main goals of inventory management is to determine the optimal order quantity and reorder point for each type of inventory. This means finding the best trade-off between holding costs and ordering costs, while avoiding shortage costs. OR can help you achieve this goal by using various inventory models and methods, such as the economic order quantity (EOQ) model, the reorder point (ROP) model, the newsvendor model, and the ABC analysis. These models and methods can help you calculate how much and when to order inventory based on factors such as demand, lead time, cost, and service level.

3 Inventory forecasting and planning

Another important aspect of inventory management is to forecast and plan for future demand and supply of inventory. This involves using historical data, market trends, customer preferences, and other factors to estimate the expected demand and supply of inventory over a certain time horizon. OR can help you improve your inventory forecasting and planning by using various techniques, such as time series analysis, regression analysis, simulation, and optimization. These techniques can help you identify patterns, relationships, and uncertainties in your data, and generate scenarios, solutions, and recommendations for your inventory decisions.

4 Inventory control and evaluation

The final aspect of inventory management is to monitor and evaluate the performance of your inventory system and make adjustments as needed. This involves tracking and measuring the actual demand and supply of inventory, comparing them with the planned or expected values, and identifying any deviations or errors. OR can help you enhance your inventory control and evaluation by using various tools, such as dashboards, reports, key performance indicators (KPIs), and feedback loops. These tools can help you visualize, communicate, and analyze your inventory data, and provide feedback and suggestions for improvement.

Inventory management is a complex and dynamic process that requires constant attention and adaptation. OR can help you manage your inventory more efficiently and effectively by providing you with a systematic and scientific approach to decision making, forecasting, planning, and control. By applying OR to your inventory management, you can reduce costs, increase customer satisfaction, and improve profitability.

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?