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