Inventory Optimizations

Overview

Companies that sell a material product will hold inventory in order to ship a product as soon as it is ordered. (that is, to decrease the lead time for customers)

However, holdling inventory incurs costs for the firm. Therefore, firms will seek to optimize their processes for ordering and holding inventory in order to minimize these costs and balance them against the value of decreased lead time.

Models

• Simple Optimization The simple model assumes a constant product demand, where the entire inventory is depleted before anything is re-ordered. Re-ordering is by a fixed quantity and gets filled immediately. This model is overly simplistic but is valuable in examining the tradeoff between order size and inventory costs.