Wednesday, March 11, 2009

Inventory Control Method: Cyclical or Fixed Order Interval System

The cyclical system, or fixed order interval system as it is sometimes called, is the oldest and simplest of the system now found in use. However, cyclical system is not widely used anymore today except in smaller and medium-size operations.

Operationally, the cyclical system work like this. It is a time-based operation which involves scheduled periodic reviews of the stock level of all inventory items.

Looking at it in manufacturing setting, when the stock level of a given item is not sufficient to sustain the production operation until the next scheduled review, an order is placed to replenish the supply. The frequency of review is determined judgmentally and varies with the degree of control desired by management; A items might be reviewed weekly (or more often), B items monthly or bimonthly, and C items quarterly or semiannually.

Stock level can be monitored by physical inspection, by visual review of most perpetual inventory record cards, or by automatic computer surveillance.

When to Order in cyclical or fixed order interval system ?

When to order in this method of inventory control system is answered or controlled by the review dates established by the inventory manager. If material usage has remained reasonably stable, an order is usually place each time the item is reviewed. The order date decision is also impacted by the quantity previously ordered.

How much to order in this type of inventory control ?

How much to order in this method is generally determined by three factors:

1. the number of days between reviews

2. the anticipated daily usage during the cycle period

3. the quantity actually on hand and on order at the time of the review

One of the primary reasons this system is used is to control high-value items closely and to maintain a relatively low investment in inventory. Hence, the order quantity typically is the quantity required to cover only the ensuing period, with allowance for order lead time. Occasionally a two or three period supply is ordered, but not as a rule.

What is the Stock Level set in this method ?

Generally a small safety stock is carried in this method. The safety stock level is based on the observed lead time variability. Inventory levels and tightness of control are thus determined by the establishment of the period of the cycle. High-value A and B items typically are placed on short cycles and C items on longer cycle.

Where mostly this method works ?

This inventory control system can be used with both dependent demand and independent demand materials. It woks most effectively in an organization that has a continues operations function, manufacturing or service, in which demand is fairly stable and can be predicted with reasonable accuracy. Additionally, it is probably the most efficient system to use for independent demand items that experience irregular or seasonal demand and for any items whose purchases must be planned months in advance because of infrequent supplier production schedules. In these case it tends to keep inventory levels lower than would be possible with the other applicable systems. When used for materials with these characteristics, however, the system must be augmented with a minimum balance figure which signals the need for an early reorder in the case of a sharp usage increase.

Conclusion:

To conclude, the cyclical system finds its greatest usage in organizations that have large numbers of independent demand items to control, or in relatively simple process operations where dependent item demand can be projected easily from the production schedule. When used for dependent demand items in an intermittent manufacturing operation, it becomes difficult to determine cycle period demands if many product are involved or if individual items are used in several different products. The bill of materials explosion and time-phasing capabilities of an MRP system must all be handled manually in the cyclical system. As product complexity increase, this becomes a virtually impossibility, so historical demand data tend to become the basis for order quantity determination – and this soon leads to unreasonably high inventory levels because of the uncertainties associated with near-term demand. For these reasons, MRP systems have replaced most cyclical system in intermittent manufacturing operations.

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