Inventory model is a mathematical model that helps business in determining the optimum level of inventories that should be maintained in a production process, managing frequency of ordering, deciding on quantity of goods or raw materials to be stored, tracking flow of supply of raw materials and goods to provide uninterrupted service to customers without any delay in delivery.
There are two types of Inventory model widely used in business.
- Fixed Reorder Quantity System
- Fixed Reorder Period System.
Fixed Reorder Quantity System.
Fixed Reorder Quantity System is an Inventory Model, where an alarm is raised immediately when the inventory level drops below a fixed quantity and new orders are raised to replenish the inventory to an optimum level based on the demand. The point at which the inventory is ordered for replenishment is termed as Reorder Point. The inventory quantity at Reorder Point is termed as Reorder Level and the quantity of new inventory ordered is referred as Order Quantity.
Average Demand (DAv): It is the average number of order requests made per day.
Average Lead Time (TL): The time required to manufacture goods or product.