Inventory Management
Overview
Inventory management refers to the process that a company uses to determine the optimal amount of inventory to hold at any given time.
In general, a firm must evaluate the trade off between holding inventory to meet customer demand (and in particular unexpected demand) and
the cost of holding that inventory. Inventory management models estimate the relevant values and probabilities and runs an optimization to
determine the best level.
Inventory management is a part of the larger subject of
working capital management.
Definitions
Inventory Policies
Inventory Policies describe various processes that companies use to monitor and adjust inventory levels.
Each policy has various advantages and disadvantages. These are some typical policies.
-
Reorder Point - The reorder point policy will trigger a reorder whenver the inventory drop
beneath a given level. The amount ordered is fixed. Time between reorders is random, depending
on demand.
-
Periodic up to Level - This policy does a peridic review of inventory items and reorders
inventory up to a given predefined level. Under this policy, the time between orders is fixed, the size
of the order is random, depending on how much the inventory has been depleted since the last re-order.
-
Reorder point fixed quantity - this policy orders a fixed quantity of inventory at fixed periods if the
the inventory is below a given threshold at the reorder point.
Topics
- Optimizations :
An optimal inventory management policy is a policy that maximizes value by weighing the
costs of holding inventory versus the gain in customer value from receiving a product
earlier than the amount of time required to produce the product (called the lead time).
- Stochastic Modeling - improves upon the deterministic model
by adding uncertainty
