How Queuing Theory Can Help Your Business Manage Inventory
While queuing theory primarily involves the mathematical analysis of any kind of waiting line, its principles also apply to other real-world scenarios like inventory management.
Being able to control inventory in an optimal manner lets businesses improve efficiencies and ultimately their bottom lines. This kind of efficiency isn’t limited to large multinational enterprises; even small to medium businesses are able to leverage these advanced queuing techniques to improve their inventory handling processes.
A Closer Look at Queuing Theory
The first concepts involving queue management saw their genesis in the early 20th century. A Danish telephone engineer, Agner Krarup Erlang, modeled the number of phone callers attempting to use a single telephone exchange and being forced to wait in a queue because of the limited amount of available lines. Erlang’s Formula, while relatively simple, still makes up the basic mathematical framework of todays advanced phone networks.
In this theory, queuing nodes are described by three items using an ASC nomenclature known as Kendall’s notation. The “A” stands for arrivals, which could be any entity waiting in a line, such as cars, people, or inventory items. “S” describes the time it takes to serve an arrival; for inventory items, it means the time spent waiting on a shelf. The “C” stands for the number of servers managing the queue; its inventory management application could be considered the number of orders requiring that inventory.
There is a multitude of scholastic papers and documents dealing with the application of queue management theory to manage inventory systems. However, most small businesses don’t have the time to read and analyze a Ph.D.-level mathematical thesis on how queue management can improve their bottom line. Distilling these higher-end concepts to something applicable to an inventory-dependent business is something that happened over time and is dictated by necessity.
Queue Management Techniques for Inventory
Two scheduling policies derived from queue management theory are commonly used by businesses to efficiently manage their inventory. FIFO, which stands for First In, First Out, ensures the oldest items in a business’s inventory supply are constantly rotated so they are used first. The FIFO technique is especially vital for businesses engaged in the retail of perishable foods, because those items quickly lose their value after the expiration date. FIFO was derived from the famous queuing concept, First Come First Served (FCFS).
Last In, First Out (LIFO) is used in computing as a stack structure, in which the last item placed in memory is the first item removed. In inventory management, it involves always using the newest item placed in inventory first. This is a technique leveraged by businesses to take advantage of rising commodity prices. A company calculates Cost of Goods Sold on the newly sold item at a higher price, while the remaining inventory holds a lower asset value for the business.
Intelligent application of this technique decreases an organization’s overall tax liability. LIFO is usually only used by businesses that sell items with varying prices, but hold a relatively long shelf life, like gas stations.
While queuing theory is something quite obscure that has inspired many a doctoral thesis over the years, its techniques still provide a measure of inventory management efficiency and ultimate cost savings to small and medium-sized businesses today.