Inventory Theory

Inventories are materials stored, waiting for processing, or experiencing processing. They are ubiquitous in modern business. Observation of almost any company balance sheet reveals that a very significant part of its assets comprise inventories of raw materials, products within the production process, or finished products. Most managers don't like inventories, because they are like money placed in a drawer, assets tied up in investments that are not earning money. They also incur costs for the care of the stored material and are subject to spoilage and obsolescence. The goal of programs such as "just-in-time" manufacturing is to reduce inventory levels.

In spite of all these bad features, inventories do have positive purposes. Raw material inventories provide a stable source of the materials required for production. A large inventory requires fewer replenishments and may reduce ordering costs because of economies of scale. In-process inventories reduce the impacts of the variability of the production rates in a plant and protect against failures in the processes. Final goods inventories provide for better customer service. The variety and easy availability of the product is an important marketing consideration. There are other kinds of inventories, including spare parts inventories for maintenance and excess capacity built into facilities to take advantage of the economies of scale of construction.

Because of their practical and economic importance, the subject of inventory control is a major consideration in many situations. Questions must be constantly answered as to when and how much raw material should be ordered, when a production order should be released to the plant, what level of safety stock should be maintained at a retail outlet, or how in-process inventory is to be maintained in a production process. These questions are amenable to quantitative analysis through the subject of inventory theory.

This section describes the mathematical theory associated with inventory control. This theory is implemented in the Inventory add-in.

Unit General Considerations

This section describes Little's Law, defines inventory and illustrates the effects of variability, uncertainty and complexity.

Unit Deterministic

This section presents a number of models involving continuous demand and period replenishment. There is no uncertainty modeled, so the models a classified as deterministic. The Summary page gives the optimum policy for each model.

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Operations Management / Industrial Engineering
by Paul A. Jensen
Copyright 2004 - All rights reserved