What's your inventory decision-making process?

1 Economic order quantity

One of the most widely used inventory models is the economic order quantity (EOQ) model, which determines the optimal order quantity that minimizes the total inventory costs, including ordering costs, holding costs, and shortage costs. The EOQ model assumes that the demand rate, the ordering cost, and the holding cost are constant and known, and that the orders are placed at fixed intervals and replenished instantaneously. The EOQ formula is: EOQ = sqrt((2 x D x S) / H) where D is the annual demand, S is the ordering cost per order, and H is the holding cost per unit per year.

2 Reorder point

Another important inventory decision is the reorder point (ROP), which is the level of inventory that triggers a new order. The ROP depends on the lead time, which is the time between placing an order and receiving it, and the safety stock, which is the extra inventory held to prevent stockouts due to uncertainty in demand or supply. The ROP formula is: ROP = D x L + SS where D is the average daily demand, L is the lead time, and SS is the safety stock.

3 ABC analysis

A third inventory decision-making method is the ABC analysis, which classifies the inventory items into three categories based on their value and frequency of use. The A category consists of the most valuable and frequently used items, which require close monitoring and control. The B category consists of the moderately valuable and used items, which require moderate attention and control. The C category consists of the least valuable and used items, which require minimal attention and control. The ABC analysis helps to allocate the inventory resources and efforts more efficiently and effectively.

4 Inventory simulation

A fourth inventory decision-making method is the inventory simulation, which uses computer models to mimic the behavior and dynamics of the inventory system under different scenarios and conditions. The inventory simulation can incorporate various factors and uncertainties that affect the inventory performance, such as demand variability, lead time variability, supplier reliability, customer service level, and inventory policies. The inventory simulation can help to evaluate the trade-offs and outcomes of different inventory decisions and strategies, and to identify the best solutions for the inventory objectives and constraints.

5 Inventory optimization

A fifth inventory decision-making method is the inventory optimization, which uses mathematical techniques and algorithms to find the optimal inventory levels and policies that maximize or minimize a certain objective function, such as profit, revenue, cost, or service level. The inventory optimization can handle complex and nonlinear inventory problems that involve multiple products, locations, stages, constraints, and criteria. The inventory optimization can help to improve the inventory performance and efficiency, and to align the inventory decisions with the business goals and priorities.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?