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Inventory Management for Minimum Cost

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  • David P. Herron

    (FMC Corporation, Santa Clara, California)

Abstract

One of the most popular types of inveatoiy management is the (Q, r) system, in which a quantity Q of an item is reordered whenever the inventory position reaches the reorder point r. A number of packaged computer programs are available for this system. However, these programs seldom give the minimum-cost values of Q and r, since they usually employ the Wilson Economic Order Quantity. Use of the Wilson EOQ may result in substantial excess costs, particularly for items of high annual cash flow. This article describes graphical and algebraic methods suitable for computer application to determine accurately the minimum-cost values of Q and r, employing either dollar stockout penalties or specified service levels. Both the single-item and aggregate inventory cases are included. The methods described can readily be implied on most computers and can result in significant cost savings.

Suggested Citation

  • David P. Herron, 1967. "Inventory Management for Minimum Cost," Management Science, INFORMS, vol. 14(4), pages 219-235, December.
    • Handle: RePEc:inm:ormnsc:v:14:y:1967:i:4:p:b219-b235
    DOI: 10.1287/mnsc.14.4.B219
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    Cited by:

    1. Lee, Jun-Yeon & Schwarz, Leroy B., 2007. "Leadtime reduction in a (Q,r) inventory system: An agency perspective," International Journal of Production Economics, Elsevier, vol. 105(1), pages 204-212, January.

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