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safety stock calculation and forecasting

  • Finished goods availability. A company may be able to charge a higher price for its products if it can reliably ship them to customers at once. Thus, there may be a pricing premium associated with having high levels of finished goods on hand. However, the cost of investing in so much inventory may exceed the profits to be gained from doing so, so inventory control involves balancing the proportion of allowable backorders with a reduced level of on-hand finished goods. This may also lead to the use of a just-in-time manufacturingsystem, which only produces goods to specific customer orders (which nearly eliminates inventory levels).
  • Work in process. It is possible to reduce the amount of inventory that is being worked on in the production process, which further reduces the inventory investment. This can involve a broad array of actions, such as using production cells to work on subassemblies, shifting the work area into a smaller space to reduce the amount of inventory travel time, reducing machine setup times to switch to new jobs, and minimizing job sizes.
  • Reorder point. A key part of inventory control is deciding upon the best inventory level at which to reorder additional inventory. If the reorder level is set very low, this keeps the investment in inventory low, but also increases the risk of a stockout, which may interfere with the production process or sales to customers. The reverse problems arise if the reorder point is set too high. There can be a considerable amount of ongoing adjustment to reorder levels to fine tune these issues. An alternative method is to use a material requirements planning system to order only enough inventory for expected production levels.
  • Bottleneck enhancement. There is nearly always a bottleneck somewhere in the production process that interferes with the ability of the entire operation to increase its output. Inventory control can involve placing an inventory buffer immediately in front of the bottleneck operation, so that the bottleneck can keep running even if there are production failures upstream from it that would otherwise interfere with any inputs that it requires.
  • Outsourcing. Inventory control can also involve decisions to outsource some activities to suppliers, thereby shifting the inventory control burden to the suppliers (though usually in exchange for a reduced level of profitability).