APPENDIX B

Inventory Margin Analysis

Commonly used methods for determining inventory levels include the economic order quantity (EOQ) model, the service level method, and the newsvendor model, discussed in Chapter 2. Each of these methods has the following specific disadvantages:

  • The EOQ model ignores demand and supply variability and calculates supply requirements in order to minimize holding and ordering (a.k.a. setup) costs. Therefore, this method is applicable to situations in which variability is not present—such as optimizing a fixed production schedule by trading off inventory levels against setup costs based on production quantities and product mix—but it does not provide adequate guidance when variability is present.
  • The service level ...

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