Definitive Business Plan, Second Edition, The

What you need, when you need it

Too much inventory costs you money. It ties up cash in stock that can, of course, become obsolete or damaged. At the other extreme, not enough inventory tests customer loyalty and leads to lost or delayed sales. Remember how you reacted last time that you were told that something you wanted was out of stock?

You know your minimum inventory levels (established in Chapter 8 ). Obviously this is not necessarily the optimum level, but it can be identified using some simple arithmetic. Consider that the only things that vary are:

• Ordering costs – the costs of processing purchase orders, taking delivery and/or tooling up for a production run, and so on. Ordering costs per unit decline as volumes increase due to economies ...