This chapter introduces the fundamentals of inventory control theory. We showed that the two most important problems are (1) how much to order and (2) when to order.

We investigated the economic order quantity, which determines how much to order, and the reorder point, which determines when to order. In addition, we explored the use of sensitivity analysis to determine what happens to computations when one or more of the values used in one of the equations change.

The basic EOQ inventory model presented in this chapter makes a number of assumptions: (1) known and constant demand and lead times, (2) instantaneous receipt of inventory, (3) no quantity discounts, (4) no stockouts or shortage, and (5) the only variable costs are ordering cost and carrying cost. If these assumptions are valid, the EOQ inventory model provides optimal solutions. On the other hand, if these assumptions do not hold, the basic EOQ model does not apply. In these cases, more complex models are needed, including the production run, quantity discount, and safety stock models. When the inventory item is for use in a single time period, the marginal analysis approach is used. ABC analysis is used to determine which items represent the greatest potential inventory cost so these items can be more carefully managed.

When the demand for inventory is not independent of the demand for another product, a technique such as MRP is needed. MRP can be used to determine the gross and net material requirements for products. Computer software is necessary to implement major inventory systems, including MRP systems, successfully. Today many companies are using ERP software to integrate all of the operations within a firm, including inventory, accounting, finance, and human resources.

JIT can lower inventory levels, reduce costs, and make a manufacturing process more efficient. Kanban, a Japanese word meaning “card,” is one way to implement the JIT approach.