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Poole College of Management 
Supply Chain Resource Cooperative

SUMMARY: Inventory Management Models : A Tutorial

February 2, 2011

SUMMARY

  • Inventory serves a useful purpose in the supply chain. That said, firms can help minimize the need for inventory by carefully managing those factors that drive inventory levels up.
  • Inventory items can be divided into two main types: Independent demand and dependent demand items. The systems for managing these two types if inventory differ significantly.
  • The two classic systems for managing independent demand inventory are periodic review and perpetual review systems.
  • The economic order quantity (EOQ) is the order quantity that minimizes total holding and ordering costs for the year. Even if all the assumptions don’t hold exactly, the EOQ gives us a good indication of whether or not current order quantities are reasonable.
  • The reorder point formula allows us to determine the safety stock (SS) needed to achieve a certain cycle service level. In general, the longer the lead times are, and the greater the variability of demand and lead times, the more SS we will need.