Top Inventory Management Methods
1. Optimal Order Quality Technique: This technique was developed by Harris in 1913, but given a more substantive form by Wilson in 1934. Otherwise known as a classical economic order quantity formula, it is still applied today in inventory control management. This model makes certain assumptions in the application such as:
- Demand is consistent and continuous
- Ordering and holding costs are constant overtime
- The batch quantity does not need to be an integer and the whole batch is delivered at the same time
- No shortages are allowed
In this model, equilibrium is achieved when holding costs and ordering quantities become exactly equal. However, this model doesn't hold up if the assumptions made are not valid. One such situation is when even small errors occur in the batch quantities, it can alter the inventory holding costs dramatically. In that instance more realistic techniques should be used.
2. Silver-Meal Heuristic Model: This is a much more intuitive and simple heuristic method. This sequential method determines the delivery in period one, and simultaneously takes into account the successive demands in periods two and three. When considering period two, a simple test is applied to decide whether this period demand should be added to the delivery batch in the first period. The principle behind this is that under the Silver-Meal heuristic model, the cost per period is considered an alternative to costs per unit; otherwise designated as 'Least Unit Cost' heuristics. Subject to other things being equal, the Silver-Meal heuristic model is considered superior to 'Least Unit Cost' heuristics because it brings a more effective approximation in forecasting.
3. Wagner-Whitin Algorithm: With the application of algorithm principles, this technique provides an almost exact and optimized solution. The Wagner-Whitin method was developed in 1958 and has been continuously refined by Zangwill (1966), and others such as Federgruen & Tzur (1991, 1994,1995), and Wagelmean et al (1992). The superiority of this method can be found in its applying a finite time horizon against an infinite time horizon, which is real but needs to be handled in determining an optimal solution to the lot sizes in an inventory.