Single Period Inventory Control

Single period inventory control is done before purchasing or selling goods.

Single period inventory control is done before purchasing or selling goods.

Companies that sell products maintain inventory. Some companies keep significant inventory on hand while others keep their in-house or warehouse stock at the lowest levels possible. Companies use a variety of methods to track and control this inventory. One method is single period inventory control. Single period inventory control is most typically used by companies that sell immediately perishable stock including excessive hotel or flight inventory, daily newspapers and sports play-off attire.

Definition

Single period inventory control is used when a company makes a one-time ordering decision or a one-time purchase of stock. With single period inventory control inventory is perishable and there is no replenishment of stock. The company must determine the optimal number of goods to purchase for sale so as to not have too little but also to avoid having worthless remnant stock. For example, when a company purchases t-shirts or flags to sell at a championship game between two teams, the company uses single period inventory control.

Example

A vendor for the national college football championship must determine what his company’s product mix for the event will be. He must estimate how many people will buy what items. The vendor can charge a much higher price before the game, in the days leading up to the game and the day of the game before it actually starts, than he can once the game begins. The vendor must estimate the total costs and risks of insufficient stock before the game and determine if this is higher or lower than those for too much stock unsold after the game. Single inventory control provides a method for this analysis.

Determination

With single period inventory control, in order for a company to determine the quantity that it should stock, it must consider the expected profit and loss associated with either too much expiring or perishable inventory or too little. The optimal inventory level occurs where the overall expected benefit to the company for stocking the next product unit is less than the expected total cost for that product unit. Benefits and costs are problem dependent. For example, the benefits and costs for excess hotel room space is different than that for sports event gear.

Usage Example

For hotel overbooking, hotels often overbook for conferences or special events to capture as much possible revenue and because a number of customers cancel last minute. The cost of underestimating the number of cancellations is the average room rate charged times the number of vacant rooms. The cost of overestimating the cancellations is the fee the hotel must pay another hotel to house the customer. Single point inventory control helps hotels determine the number of rooms to oversell.

References

Resources (Further Reading)