Two-tier inventory control

Stocks can be kept on two levels: central warehouse and district store.

Maintaining a two-tier stocks minimizes the total inventory of the material, while maintaining the same level of risk of a run out in one of the sub-stores, district stores (i.e. the point directly serving the client's needs).

Examples of structures that use a two-tier inventory control can be:

• traders - have their own warehouses and a network of retail stores,
• service company - with many repairs ships, with components supplied from a central store.

In the central warehouse inventories goods with relatively constant intensity of demand, as well as a short shelf life should be kept. They must be getting straight to the stores, from which they go directly to the customer. An example would be bread. In contrast, products such as coffee, tea, alcohol can only be in certain amounts stored in the central warehouse.

District stores and warehouses collects safety stock, which cover the demand higher than forecasted demand. The amount of such reserve stock can be determined by the formula:

• $Zr=k{\sqrt {l{\bar {y}}}}$

where:

• k - the safety factor, i.e. size resulting from the tolerable risk of stocks depletion.
• l - the average time elapsed from the occurrence of the need for the coming deliveries from the central warehouse (in units of time, used to measure demand)
• y - the average value of demand for particular product.

See also:

• Logistic audit

Examples of Two-tier inventory control

1. Just-in-Time (JIT) Inventory System: This inventory system is a technique that seeks to reduce the cost of inventory storage and management by ordering stock only when it is needed. Under JIT, a company will order a specific amount of parts from a supplier to be delivered at set intervals, such as once a week or once a month. Once the parts arrive, they are quickly processed, stored, and then used for production. This reduces the amount of inventory that needs to be stored at one time and eliminates the need for a large, central warehouse.
2. Cross-Docking: Cross-docking is a type of inventory control system in which goods are unloaded from an incoming truck and quickly loaded onto an outgoing truck without being stored in a warehouse. This allows for goods to move quickly between locations, eliminating the need for long-term storage.
3. Vendor Managed Inventory (VMI): Vendor managed inventory is a system in which the vendor is responsible for managing and maintaining the inventory of a company. Under VMI, the vendor monitors the inventory levels of the company and places orders when the levels drop below a certain threshold. This can help to reduce inventory costs and increase efficiency by ensuring that the company only orders what it needs.

Advantages of Two-tier inventory control

Two-tier inventory control is a system of managing stocks in such a way that goods are stored in two separate locations: a central warehouse and district stores. This system has several advantages, including:

• Reduced inventory costs: By keeping some stock in a central warehouse and some in district stores, companies can reduce the amount of inventory they need to keep and purchase. This can lead to lower inventory costs as well as better cash flow management.
• Improved customer service: By keeping stock in district stores, companies are able to respond quickly to customer orders and provide better customer service. This can lead to increased customer satisfaction and loyalty.
• Improved product visibility: By keeping stock in district stores, companies can increase the visibility of their product and reach more potential customers. This can lead to increased sales and profits.
• Increased flexibility: By having two different storage locations, companies can better adapt to changing market conditions. This can give them a competitive edge over other companies.

Limitations of Two-tier inventory control

Two-tier inventory control has its limitations, including:

• Difficulty in forecasting demand accurately: As two-tier inventory control relies on the accuracy of demand forecasts, it can be difficult to accurately predict future demand and stock levels.
• Increased complexity of inventory tracking: With two-tier inventory control, tracking inventory at two locations can be more complex and time-consuming than tracking one central inventory.
• Increased costs: Having two sets of inventory requires additional costs, such as higher shipping and handling fees, as well as labor costs for managing the two sets of inventory.
• Increased risk of stock-outs: With two-tier inventory control, if one of the locations is out of stock, the other may take longer to replenish the inventory, resulting in stock-outs.

Other approaches related to Two-tier inventory control

These approaches allow the business to maintain levels of inventory in both the central warehouse and the district stores. The following are the other approaches related to Two-tier inventory control:

• Vendor Managed Inventory (VMI): This approach is used to keep the inventory levels in both the central warehouse and the district stores at optimal levels. This is done by having the vendor manage the inventory in both locations.
• Just in Time (JIT) Inventory Control: This approach allows businesses to reduce their inventory levels by only ordering and stocking items that are in demand. This helps to reduce the amount of inventory in the warehouse and stores.
• Reorder Point (ROP) Inventory Control: This approach allows businesses to maintain a predetermined inventory level by calculating the reorder point and setting it accordingly. This helps businesses to keep their inventory levels at optimal levels.

In summary, there are a variety of other approaches related to Two-tier inventory control, such as Vendor Managed Inventory (VMI), Just in Time (JIT) Inventory Control, and Reorder Point (ROP) Inventory Control. These approaches help businesses to reduce their inventory levels, maintain optimal inventory levels, and better manage their inventory.

Two-tier inventory control — recommended articles

Maximum stock level — Buffer inventory — Optimum size of the order — Regional distribution centre — Safety stock — Inventory system — Agile supply chain management — Production logistics subsystem — Stock level

References

• DeCroix, G. A., & Zipkin, P. H. (2005). Inventory management for an assembly system with product or component returns. Management Science, 51(8), 1250-1265.
• Magee, J. F., & Boodman, D. M. (1967). Production planning and inventory control.
• Smaros, J. and Holmstrom, J. (2000), "Viewpoint: reaching the consumer through grocery VMI", International Journal of Retails & Distribution Management, Vol. 28 No. 2, p. 55-61
• Tersine, R. J. (1994). Principles of inventory and materials management.