What Is Inventory Variance?

Inventory theory is a branch of operations research. It is a mathematical method to study how to determine a reasonable amount of storage and the corresponding order cycle, production batch and production cycle to ensure the supply and keep the total cost to a minimum. Controlling and maintaining inventory is a common issue for every economic sector and unit. There are four functional aspects of inventory: timeliness, discontinuity, uncertainty, and economics. Temporal factor means that the goods go through a long production and distribution process before they reach the final consumer. No one wants to wait for such a long time when purchasing goods. If inventory is available, the lead time can be shortened to meet demand; discontinuities make it possible to deal with various interdependent businesses in an independent and economic way; Uncertainty refers to the unforeseen event that caused the organization to change its original plan; economic factors allow the enterprise to use costs to choose a solution. There are three types of inventory problems according to the future demand situation: deterministic, risky and uncertain. The deterministic type refers to the inventory problem in which the future demand is known exactly; the risk type refers to the inventory problem in which the probability distribution of future demand is known, and the uncertainty type refers to the inventory problem in which the future demand has no certain probability. ^[1]

Inventory theory (or more formally the mathematical theory of inventory and production) is a sub-specialty in operations research and operations management, designing production / inventory systems to minimize costs: it studies decisions faced by companies and the military in manufacturing, storage ,

At time k, the

Inventory. It will then order (and receive)

Items and sell

Term, where w follows a given probability distribution. thereby:

Whether to allow

Negative, which corresponds to the back item, will depend on the specific situation; if allowed, the back order will usually be penalized. The store has costs associated with the number of items in the store and the number of items ordered:

This usually represents the form of addition:

The store wants to choose the best

, That is minimized

.

Many other items can be added to the model, including multiple products, inventory caps, and more. The inventory model can be based on different assumptions: ^[3]

Although the number of models described in the literature is huge, here is a classic list:

1. Infinite fill rate of parts being produced: economic order quantity model, aka Wilson EOQ model

2. Constant Filling Rate of Parts Being Produced: Economic Production Quantity Model

3. Demand is random, only one replenishment: classic news recommendation mode

4. Demand is random and continuous replenishment: basic inventory model

5. Deterministic demand over time: dynamic batch model or Wagner-Whitin model

6. Determinism of demand over time: silver meal heuristics

7. Several products produced on the same machine: economic batch scheduling problem

One application is rare large orders and frequent small orders. Large orders will increase the amount of inventory on hand, which is expensive, but may benefit from volume discounts. Frequent order processing costs are high, so the resulting small inventory level may increase the possibility of inventory, leading to customer losses. In principle, all these factors can be optimized by mathematical calculations.

The second application involves changes in product demand (predictable or random). ^[4] For example, in order to sell during the proper buying season, the necessary goods are in hand. A typical example is a toy store before Christmas: if items are not on the shelf, they cannot be sold. And the wholesale market is nt perfect. There can be considerable delays, especially for the most popular toys. Then entrepreneurs or business managers will speculate on buying. Another example is furniture stores. If there are six weeks or more Delays in receipt of goods by customers and some sales will be lost. Another example is a restaurant where a significant portion of sales is in value-added aspects of food preparation and display, so it is reasonable to purchase and store more reasonably in order to reduce opportunities for key ingredients The situation usually boils down to two key questions: confidence in the sale of the goods, and the revenue generated if any?

The third application comes from the inventory and also features two separate operations. For example, work in process inventory tends to accumulate between the two departments because the consumer and production departments do not coordinate work. By improving coordination, this buffer inventory can be eliminated. This has led to the "instant" overall concept that the cost of inventory is usually underestimated, that is, direct, obvious storage space and insurance costs, and also unmeasurable costs that increase variables and complexity, thereby reducing business flexibility.