Basic Principles of Inventory Control

We have had occasion to refer to the role of inventory a number of times already in this book, and specifically we have suggested that the degree of control which is exercised over the levels of inventory held within a marketing logistics system is a key influence on the reliability of product supply within the system. That is to say, inventory control is primarily concerned with ensuring that stocks of a company’s products are made available on a consistent basis in the light of the company’s service policy to its markets and the behaviour of market demand. The major part of this chapter is concerned with describing and illustrating the basic principles of inventory control in the context of differing assumptions regarding knowledge about demand, and the lead time between placing an order for stock replenishment and actually receiving the order. In one or two instances we shall assume perfect knowledge about demand in order to more effectively portray a concept, but in reality this situation is extremely rare. In fact, we can distinguish between different classes of knowledge about demand in the future, in accordance with familiar decision theory practice. It does not happen often that a decision maker, whether he is concerned about sales planning or inventory control, is either completely ignorant about future demand, or has perfect knowledge of future demand levels. We can think of one or two situations, perhaps, in which these conditions might apply: for example, the demand for a completely new type of product may not be known at all, though it would be a foolish company which would market such a product without any prior research into consumer attitudes and behaviour. At the other extreme, that of certainty, demand may be known as the result of contracted supplies to a known and defined market.