Goods-producing companies hold inventory to fulfill orders or in anticipation of customer demand. Indeed, inventory is reported as an asset on the balance sheet, so a company’s executives may approve holding high inventory levels in order to meet its obligations. However, in a challenging business environment where products are frequently discounted or discontinued, holding inventory has become increasingly detrimental to operational performance.
A company often maintains inventory levels based on simple rules in order to ensure availability, but with no consideration given to impact on margins. Textbooks provide some approaches toward analyzing inventory margins, but the mathematical models are often too rudimentary ...