The Most Common Inventory Models

Is there a systematic way to control your inventory? Yes, there are more than one inventory models, and we explain them all in this guide on inventory management. 

In this article:

A surprising number of businesses struggle with maintaining adequate office inventory. Sometimes, they order too much of something, which leads to waste and financial losses, while other times, under-ordering hampers their operations. So, what's the best way to do basic inventory control?

If you have the same question, the answer might lie in inventory models. They promise to overcome the asset bottlenecks, making your business operations less cumbersome and more efficient. However, there is more than one inventory management system, so choosing between them can become complex. 

Therefore, we have developed a detailed guide on all the common inventory models, with their pros and cons, to help you choose one that suits your organization.

What is Inventory Control? 

Your office staff uses various equipment during a workday to ensure an efficient workflow. It includes everything from computers to printers to vehicles that help them accomplish targets. Inventory control deals with all the equipment your offices use, detailing its costs, particular use cases, longevity, and much more.

While traditional inventory control relied on pen and paper or spreadsheets, today, it is done using cloud-based software that handles everything automatically. According to Data Bridge Market Research, the global inventory management solutions market is expected to hit $148.83 million by 2030, which speaks volumes about their increasing popularity among businesses. It produces regular reports regarding the current status of your inventory, which helps you do regular maintenance or replace items beyond repair.

Inventory Control Vs. Inventory Management - Are They Same? 

Inventory control and inventory management sound very similar but don't make the mistake of thinking that they're the same thing. Inventory control means controlling or handling existing assets by monitoring their location, condition, use cases, and more. On the other hand, inventory management is a holistic system that helps plan and forecast inventory purchases, potential use cases, ordering/reordering, and more. 

Understanding the difference is critical for a company to handle its inventory. However, it's also crucial to note that quality inventory models usually offer management aspects, too, allowing 2-in-1 capabilities. Otherwise, you'll need separate inventory control and inventory management models. 

What are Inventory Control Models, and Why Do They Matter? 

An inventory management model is a well-defined framework or technique that you can use to manage your assets effectively. Having enough assets in your office ensures the effective execution of all critical operations and the timely accomplishment of pre-defined targets. 

Inventory Management Stats

The hallmark of a quality inventory management model is the information it provides about the lifecycle of each item, from the time you buy it to when it breaks down or is disposed of. Monitoring your assets with a dedicated management model removes abruptness and streamlines your inventory with business operations. 

The Most Common Inventory Models 

Now that we have all the basics out of our way, it's time to address the elephant in the room, namely inventory models. Companies use various models to manage their inventory depending on their markets and business strategies. We'll discuss them in detail so you can pick one that suits your company. 

1. FIFO: First In, First Out 

The most common inventory model is FIFO, which several companies use. This method is convenient because it requires using the oldest products before they are spoiled. If you don't see yourself using an item, FIFO can help you sell it before it's no longer usable. Accountants often use this model to examine an organization's stock levels and associated costs. 

Tracking stocks using the FIFO inventory model requires detailed records of all inventory items. Although the smallest businesses might get away with recording everything manually, medium—and large-scale companies must use cloud-based inventory management software to handle the complexity. 

2. Just in Time Model - JIT 

Applying the JIT model means ordering stock that covers the current demand without considering the future usage. JIT ensures that businesses have what they need in stock and don't have to bear holding costs for any kind of inventory. However, it requires careful planning, as you need to calculate the exact number of items your staff needs and how they plan to use them in the near future.

One significant advantage of this approach is that you save much money by not investing in stocks you don't readily need. On the other hand, a disadvantage is that it's a problematic inventory model to maintain because of its inbuilt urgency. 

3. Average Costing 

As the name of this inventory model suggests, it assigns an average cost to each item in the inventory using the overall money spent to acquire that inventory. It has a simple formula:

Average Costing = Total Money Spent / Number of Items Purchased 

Therefore, the cost of one element cannot exceed the cost of another in this model. All items cost the same since they are assigned the average. Usually, the whole inventory is revalued at the end of each accounting period, assigning the same or a different average cost to each item.

4. Economic Order Quantity (EOQ)

As an efficient business, you always want your staff to perform at their best. However, that's possible only if the equipment they use regularly is always available. The EOQ is a deterministic inventory model, which means it helps you forecast the ideal number/amount of any asset that you should order. As a result, you save a lot of money that is spent otherwise on over-ordering or work delays due to under-ordering. 

The EOQ has a simple formula:

EOQ = 2DS / C

  • D = Annual Demand
  • C = Carrying Cost
  • S = Ordering Cost

Let's elaborate this formula with an example: your office needs 3 computers worth $700 each. Moreover, the overall carrying cost of each computer is roughly $300 per annum, including software updates, accessories, repairs, and the like. 

Here's how the values will play out in the formula:

EOQ = 2*3*$700 / $300

EOQ = 14

One major flaw with this inventory model is that it presumes consistency in demand, meaning you'll require the same number of computers no matter what. It doesn't consider the financial fluctuations, device improvements (helping you use them longer), and more. It fixes the cost and holding charges for each item. Moreover, you need to check your inventory levels regularly when using EOQ.

5. Inventory/Economic  Production Quantity (EPQ) 

Known as economic or inventory production quantity, it shows the number of items you should order in a single batch to minimize holding costs. The significant difference between EPQ and EOQ is that the former assumes suppliers provide you with each item as a whole instead of parts. 

Here's the formula to calculate EPQ:

EPQ = Square Root of 2KDh(1-x)

  • K = Order costs
  • D = Demand Rate
  • h = Yearly Holding Cost Per Product
  • P = Yearly Production Rate
  • x = D/P

As we saw above, EOQ works for companies that order a consistent number of products. However, not all companies do that, so EPQ has become valuable. It allows organizations to order or receive products in parts instead of full orders. 

6. ABC Analysis 

In the case of office inventory, the ABC Analysis shows you the most critical items and categorizes them accordingly. Once you know which items are most important, you can focus more on them. Some companies use the ABC Analysis with other inventory models, such as the Just in Time model, to make it more effective. 

Usually, the ABC Analysis generates three categories: A, B, and C. However, naming the categories doesn't tell you where the most essential items should go. The Pareto Principle, also called the 80/20 rule, determines that. Let's take a deeper look at the categories in the Pareto Principle to understand how it works.

Category A: Category A contains the most expensive items in your inventory. Naturally, it also occupies the smallest percentage of your total assets—after all, your office won't have as many computers as it would have paper. Although it is only around 20% of your total assets, it helps you accomplish 70% of the tasks. 

However, it's arguably the most effective part of your inventory. For instance, without computers, you cannot do much in your office unless you're willing to spend hours and hours with a pen and paper. Category A faces the strictest controls because it contains the most valuable items, such as computers, tablets, printers, and the like. 

Category B: The items in this category aren't a matter of life and death for your business but make your life a bit easier. It makes up 30% of your inventory and roughly 25% of your overall revenue. 

Category C: Category C contains the most inconsequential items in your inventory, occupying 50% of the total number while contributing only 5% to the overall operational workflow and revenues. Although it contributes less than categories A and B, consistency goes in its favor. Moreover, Category C encounters the most lax controls because it is less valuable than the other two categories. 

7. Fixed Reorder Quantity System 

The Fixed Reorder Quantity Model determines whether you need to purchase an item by looking at the existing stock levels. It does that by fixing an amount or number to a certain level and alerting you when it dips below it. The point at which you need to reorder an item is called the Reorder Point, and the inventory amount needed at that time is called the Reorder Level. In addition, the number of new items you order is called the Order Quantity. 

  • Average Demand (DAv): It shows the demand for each item through per-day requests. 
  • Average Lead Time (TL): The time it takes for the new item to arrive. 
  • Average Lead Time Demand (DL): The number of times your staff requests an item during the Lead Time. 

Average Lead Time Demand = Average Lead Time (TL) X Average Demand (DAv) 

A. Safety Stock (S)

Safety Stock is a critical element of this inventory model, which is the additional stock you keep to encounter stock-outs on the supplier’s side. The supplier could be dealing with a machine failure, a natural calamity, a strike, and whatnot, which could delay your procurement of much-needed items to run your day-to-day operations smoothly. For instance, you could run out of printer ink, which delays printing crucial paperwork. The safety stock is determined with precise calculations considering current stock levels and the probability of future supply-side shortages. 

B. Reorder Level (RL)

The Reorder Level is the stock level at which the inventory model tells you to place orders for a specific item. It considers Safety Stock, Average Lead Time, and Lead Time to ensure that when an order is placed, the existing stock can last until the new items arrive. 

Reorder Level (RL) = Average Lead Time Demand (DL) + Safety Stock (S) 

Order Quantity (O): The number of items you are ordering. 

Minimum Level: Minimum Level is the stock you keep to avoid future shortages from the supply side. The term can be used interchangeably with Safety Stock. 

Therefore, Minimum Level (LMin) = Safety Stock (S). 

Maximum Level: The maximum level is the Safety Stock and the quantity you ordered. 

Maximum Level (LMax) = Safety Stock (S) + Order Quantity (O)

8. Fixed Reorder Period Model 

The Fixed Reorder Period Model or System uses a predefined period to order new inventory. Once that fixed period has passed, the inventory model raises an alert so that you can restock your assets. It has four essential aspects that we'll discuss below:

  • Regular Intervals: Regular intervals are the predefined periods after which an assessment of the existing inventory is due. If some items are missing, the inventory model shows you need to order them. 
  • Inventory on Hand (It): Inventory on Hand is the number of items at any time. 
  • Maximum Level (M): The maximum inventory level you can keep in stock according to the guidelines developed by considering usage, pricing, and other factors. 
  • Order Quantity: Order Quantity simply means the difference between the Inventory on Hand (It) and the inventory you have requested (M):
    • Order Quantity (O) = (M) – (It)

Use Itefy for Smart Inventory Control 

While several inventory control methods exist, implementing them is possible only with effective inventory control software. With Itefy, you get complete control over your assets in real-time, with alerts when you need to order new items. Worried about equipment loss? It won't happen anymore, as you can track each item in your inventory through Itefy. Moreover, you gain valuable insights into your inventory to control it better than ever. 

So, are you ready to control your assets like a champ? Try Itefy today on your smartphone, tablet, or computer.