Inventory evaluation and cost control

When a system is more complex and there are more potential sources of dynamic variations, a more complicated control is required. Particularly in automatic systems where human operators are replaced by machines and computers, a thorough design of control responsibilities and procedures is necessary. Control activities include automatic control of individual machines, material handling, equipment, manufacturing processes, and production systems, as well as control of operations, inventory, quality, labor performance, and cost. Careful design of correct and adequate controls that continually identify and trace variations and disturbances, evaluate alternative responses, and result in timely and appropriate actions is therefore vital to the successful operation of a system. 

Performance evaluation in these companies usually focuses on cost, with the budget as the primary control. Procurement is measured on the purchase cost of material and material overhead rates. Manufacturing has measures such as direct labor productivity and the cost of quality of delivered products. Distribution effectiveness is measured on the percentage of selling price represented by distribution cost and inventory turnover rates. 

We use the subscript D in the safety-stock parameters, since they relate to a decoupled system. As can be seen, decoupled policies are attractive because of their simplicity and the ease of their performance evaluation. Nevertheless, they may be significantly outperformed by better non-decoupled policies. Although the use of a decoupled inventory control policies may sometimes be well-justified (if, for instance, inventory holding costs at the supplier s facility are not significant, or if the supplier almost accurately forecasts the demand he faces), we advise some caution when selecting this type of policy structure merely due to its technical convenience. 

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