📦📊 Methods of Inventory Control

A. Classification using ABC Analysis

ABC Analysis is an inventory categorization technique based on the Pareto Principle (the 80/20 rule). it ranks inventory items based on their consumption value ( $Quantity\ used \times Unit\ Cost$ ) over a specific period.

Class A: Top 10-20% of items that account for 70-80% of total consumption value.
Class B: Middle 30% of items that account for 15-20% of value.
Class C: Bottom 50% of items that account for only 5% of value.

You cannot manage every item with the same level of intensity. Managing a $10,000 engine component (Class A) requires more oversight than a $0.50 bolt (Class C).

Resource Allocation: ABC analysis tells you where to spend your “mental energy” and administrative time.
Model Selection: Class A items usually require continuous review (Q-Model) to keep capital lean, while Class C items are better suited for periodic review (P-Model) or simple bulk ordering to save on shipping and paperwork.

How to do it?

Calculate Annual Value: For every SKU, multiply the annual quantity used by the unit cost.
Rank: Sort all items in descending order of their total annual value.
Cumulative Percentage: Calculate the cumulative percentage of the number of items and the cumulative percentage of the total value.
Categorize: Assign A, B, or C based on where the items fall on the cumulative value curve.

B. Inventory Control Methods

1. Q-Model

The Q-Model is a Continuous Review system. The inventory level is monitored constantly. The moment the stock drops to a predetermined Reorder Point ( $ROP$ ), a fixed quantity ( $Q$ ) (which is the $EOQ$ ) is ordered. It is “event-triggered.”

Formula of this model
How much to order? Economic Order Quantity ( $EOQ$ ), which balances ordering costs against holding costs:

$EOQ= \sqrt{\frac{2DS}{H}}$

D = Annual Demand
S = Setup/Ordering Cost
H = Holding Cost per unit per year

When to order? Reorder Point ( $ROP$ ):

$ROP=(d\times L)+SS$

d = average daily demand
L = lead time in days
SS = Safety Stock

When is it best to use?
Best for Class A items or high-value critical spares where you want to keep the average inventory as low as possible without stocking out.

2. P-Model

The P-Model is a Periodic Review system. Instead of watching stock constantly, you only check it at fixed time intervals (e.g., every Monday morning). You then order a variable amount to bring the stock back up to a “Target” level. It is “time-triggered.”

Formula of this model
Order Quantity ( $q$ ):

$q=d(P+L)+SS-I$

d = average daily demand
P = Review Period (days)
L = Lead time (days)
SS = Safety Stock
I = Current Inventory level at the time of review

When is it best to use?
Best for Class B and C items, or when you want to consolidate orders from a single supplier to save on transport costs (e.g., ordering all General Service office supplies once a month).

3. Min Max Model (s, S)

This is a Hybrid System. Like the P-Model, it is reviewed periodically, but it includes a “Minimum” ( $s$ ) threshold. If you check the stock and it is still above the Minimum, you do not order anything. You only trigger an order if the stock is $\le s$ , ordering enough to hit the Maximum ( $S$ ).

Formula of this model
If $I \le s$ , then:

$Order\ Quantity = S – I$

If $I > s$ , then:

$Order\ Quantity = 0$

When is it best to use?
Best for items with high ordering costs or items used in unpredictable bursts. It prevents the “small, frequent orders” that can happen in a pure P-Model, making it highly efficient for mining consumables like lubricants or filters.

4. Base Stock System (S-1, S)

The principal is One-for-One Replenishment. It maintains a fixed “Base” stock level ( $S$ ). The moment one unit is consumed, a replacement order for exactly one unit is triggered. There is no “Minimum” threshold other than $S-1$ .

Formula of this model

$Inventory\ Position + On\ Order = S$

Whenever an item is pulled from the shelf, $Order\ Quantity = Quantity\ Consumed$ .

When is it best to use?
Best for extremely expensive, slow-moving, and critical items. In mining, this is for “Insurance Spares” like a spare transmission for a haul truck or a specialized hydraulic pump. You don’t want a “reorder point” because you can’t afford to have zero in stock—you always want that base level of 1 or 2 units ready.