Why scientific inventory management has proved useful;

              I N SUCH DIVERSE BUSINESSES as department stores,
supermarkets, wholesalers, electro-platers, aircraft manu­facturing
and paper manufacturing, the systematic appli­cation
of explicit, scientifically-based, ordering rules has
significantly improved inventory management decisions.
The development of various inventory management sys­tems
using such rules in these industries has been docu­mented.
1 The typical result of installing such a system in
a company which did not already have one has been one
or both of the following:
1. A reduction in inventory of from 10% to 30%
2. A decrease in stockouts of from 25% to 70%
Frequently these changes have been accompanied by in­creased
sales, and often they have required no increase in
the continuing amount of effort devoted to inventory
management once the system had been installed.
Although the most sophisticated systems make use of a
computer, some quite successful systems have been
manual, while others have used tabulating equipment.
The reason for the results obtained from the installation
of scientifically-based inventory systems lies partially in
the large number of reordering decisions which have to
be made when managing inventories ranging from several
hundreds to many thousands of items, with differing and
changing demands. It is unrealistic to expect that all of
these decisions will be made in a consistent manner with­out
explicit rules for "when" and "how much" to reorder
and a formal system to ensure that the rules are followed.
And the rules are not likely to be set properly without an
understanding of the relationships between order quanti­ties
and inventory costs on the one hand and between
inventory levels and stockouts (or customer service levels)
1 Joseph Buchan and Ernest Koenigsberg, Scientific Inventory
Management, Prentice-Hall, Inc., 1963
ZOQ=J-S
= 100
C0 = $2.00
10 0 30
Order quantity (q) >-
EXHIBIT 1
on the other. It is in the setting of the rules that an ele­ment
of the "scientific method" is brought to bear on the
inventory management problem.
The concept of "making a model of a system (or opera­tion)
", is a fundamental technique in science which turns
out to be quite useful in inventory management. A model
is a simplified reproduction of the important relationships
in an operation or a system. It may be a set of equations,
a simple flow chart, or an elaborate computer program.
If the model adequately represents the operation, we can
WHY SCIENTIFIC
INVENTORY MANAGEMENT
HAS PROVED
USEFUL
by Joseph F. Buchan