Operations Management: An Integrated Approach, 5th Edition

DETERMINING ORDER QUANTITIES

The objectives of inventory management are to provide the desired level of customer service, enable cost-efficient operations, and minimize the inventory investment. To achieve these objectives, a company must first determine how much of an item to order at a time.

Inventory management and control are done at the level of the individual item or stock-keeping unit (SKU). An SKU is a specific item at a particular geographic location. For example, a pair of jeans, size 32 × 32, in inventory at the plant and also eight different warehouses, represents nine different SKUs. A pair of the same jeans held at the same locations but a different size (32 × 34) represents nine additional SKUs. The same style of jeans in a different color represents additional SKUs.

Stock-keeping unit (SKU)

An item in a particular geographic location.

Let's look at how a company determines how much of an SKU to order. We will consider some common approaches in this section, summarized in Table 12-4. In the next section we will look at mathematical models for determining order quantity.

TABLE 12-4 Common Ordering Approaches

Lot-for-lot	Order exactly what is needed.
Fixed-order quantity	Order a predetermined amount each time an order is placed.
Min-max system	When on-hand inventory falls below a predetermined minimum level, order a quantity that will take the inventory back ...