Inventory Theory
1. Definition of the Inventory Theory
Inventory theory (or more formally the mathematical theory of inventory and production) is the sub-specialty within operations research that is concerned with the design of production/inventory systems to minimize costs. It studies the decisions faced by firms and the military in connection with manufacturing, warehousing, supply chains, spare part allocation and so on; it provides the mathematical foundation for logistics.
Inventories are materials stored, waiting for processing, or experiencing processing. They are ubiquitous in modern business. Observation of almost any company balance sheet reveals that a very significant part of its assets comprise inventories of raw materials, products within the production process, or finished products. Most managers don 't like inventories, because they are like money placed in a drawer, assets tied up in investments that are not earning money. They also incur costs for the care of the stored material and are subject to spoilage and obsolescence. The goal of programs such as "just-in-time" manufacturing is to reduce inventory levels.
In spite of all these bad features, inventories do have positive purposes. Raw material inventories provide a stable source of the materials required for production. A large inventory requires less replenishment and may reduce ordering costs because of economies of scale. In-process inventories reduce the impacts of the variability of the production rates in a plant and protect against failures in the processes. Final goods inventories provide for better customer service. The variety and easy availability of the product is an important marketing consideration. There are other kinds of inventories, including spare parts inventories for maintenance and excess capacity built into facilities to take advantage of the economies of scale of construction.
Because of their practical and economic importance, the subject of inventory control is a major
Inventory theory (or more formally the mathematical theory of inventory and production) is the sub-specialty within operations research that is concerned with the design of production/inventory systems to minimize costs. It studies the decisions faced by firms and the military in connection with manufacturing, warehousing, supply chains, spare part allocation and so on; it provides the mathematical foundation for logistics.
Inventories are materials stored, waiting for processing, or experiencing processing. They are ubiquitous in modern business. Observation of almost any company balance sheet reveals that a very significant part of its assets comprise inventories of raw materials, products within the production process, or finished products. Most managers don 't like inventories, because they are like money placed in a drawer, assets tied up in investments that are not earning money. They also incur costs for the care of the stored material and are subject to spoilage and obsolescence. The goal of programs such as "just-in-time" manufacturing is to reduce inventory levels.
In spite of all these bad features, inventories do have positive purposes. Raw material inventories provide a stable source of the materials required for production. A large inventory requires less replenishment and may reduce ordering costs because of economies of scale. In-process inventories reduce the impacts of the variability of the production rates in a plant and protect against failures in the processes. Final goods inventories provide for better customer service. The variety and easy availability of the product is an important marketing consideration. There are other kinds of inventories, including spare parts inventories for maintenance and excess capacity built into facilities to take advantage of the economies of scale of construction.
Because of their practical and economic importance, the subject of inventory control is a major
Bibliography: Web pages: http://www.me.utexas.edu/~jensen/ORMM/omie/operation/unit/inventory/index.html http://en.wikipedia.org/wiki/Inventory_theory http://www.me.utexas.edu/~jensen/ORMM/supplements/units/inventory/inventory.pdf http://www.whitman.edu/mathematics/SeniorProjectArchive/2006/zapponj2.pdf http://www.ime.unicamp.br/~andreani/MS515/capitulo12.pdf http://or.journal.informs.org/cgi/content/abstract/54/1/150