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Operations Notes – Inventory Management

Cycle stock – up and down inventory cycles that arise from reorder quantity choices
4 basic costs to balance:

  1. Variable costs
  2. Ordering costs
  3. Holding costs
  4. Backorder costs

SL = Service Level

If there are no volume discounts (and demand is steady), can use the EOQ (Economic Order Quantity) formula:

h – depends on storage costs, opportunity cost of capital, risk of obsolescence, shrinkage. Increase in variability ⇒ increase in safety stock