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determine min max inventory levels

Is there a simple equation or way in which to determine what the minimum and maximum inventory levels should be in a hypothetical warehouse? What information must be known in order to determine the Kmin and Kmax inventory levels?

Is the determination if min/max inventory levels at all like determining the upper and lower control limits in statistics?

Please help....I need a good simple explanation and equation about calculating min/max inventory control levels?

Many thanks

M

Solution Preview

Hello,

Unfortunately, there is no simple equation to determine inventory levels. If it were that simple, one of the most difficult tasks in business, inventory planning, would be solved. I will assume this is a warehouse of finished goods. The first question is what service level do we promise our customers? If we promise them that 95% of the time when they place an order we can ship means something very different from 90% or 99%. So, say we promise them 95% of the time we will have their ordered item.

But now we need to understand the nature of the demand from our customers, assuming we have many. Do some customers order large amounts a few times or small amounts many times? Do others do the exact opposite? Is the product a seasonal one with, say, 80% being ordered from September to November for Christmas? Now, we also need to understand our products' life cycle profile. Are some products becoming obsolete and being phased out? Are others newly introduced to the market? Since your question included no information about product or customers, I need to make some assumptions. We will simplify and ignore all of this for the moment, which we could never do in real life.

Inventory exists for only two reasons - to serve as a cushion to match the vagueries of demand (the customer) and the vagueries of the supply (the suppliers). If supply could match demand prefectly as in a made-to-order (MTO) arrangement, then there would be no need to hold finished goods inventory. But what about components and assemblies? I will need to ignore that too, because even in a MTO environment you will still need to plan for this kind of inventory.

The vagueries of demand can be somewhat managed with excellent customer relationships, where the customer shares with you openly what their purchasing needs will be over the next 12 months. Since this is ...

Solution Summary

How to determine inventory levels and their min and max levels

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