Inventory management techniques

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INVENTORY MANAGEMENT TECHNIQUES

While the total ordering costs can be decreased by increasing the size of order, the carrying costs increase with the increase in order size indicating the need for a proper balancing of these two types of costs behaving in opposite directions with changes in order size.

Again, if a company wants to avert stock-out costs it may have to maintain larger inventories of materials and finished goods, which will result in higher carrying costs. Here also proper balancing of the costs becomes important.

Thus, the importance of effective inventory management is directly related to the size of the investment in inventory. To manage its inventories effectively, a firm should use a systems approach to inventory management. A systems approach considers in a single model all the factors that affect the inventory.

A system for effective inventory management involves three subsystems namely:

1.economic order quantity

2. reorder point

3. stock level

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