Saturday, May 20, 2017

Optimum inventory levels

One operating objective of inventory management is to minimize costs. Excluding the cost of merchandise, the costs associate with inventory fall into two basic categories:
*Ordering or acquisition or set-up costs
*Carrying costs These costs are an important element of the optimum level of inventory decisions.
Costs of insufficient inventory:
*Idle resources if no raw materials
*Difficult to meet new orders
*Order quantities small
*No economies of scale

However, increasing an inventory that is already at an optimum level may decrease profit as a result of increased carrying charges and obsolescence.

Determination of the optimal inventory level involves a systematic balancing of the savings in inventory carrying costs against the increased reorder costs.
Optimum inventory level
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