Determining Order Quantities and Inventory Levels

Determining Order Quantities and Inventory Levels

  • Dependent Demand – The item is part of a larger component or product, and its use is dependent on the production schedule for the larger component.
  • Independent Demand – The usage of the inventory item is not driven by the production schedule, but directly by customer orders.
  • Fixed-Quantity Models – These models involve the classic trade-off of determining lot sizes between the costs of carrying extra inventory and the costs of purchasing or making more frequently.  The objective of a fixed quantity model is to minimize total costs.  One order a fixed quantity and then reorders when the amount gets to a trigger or reorder point
  • Fixed-Period Models – In fixed quantity models, orders are placed when the reorder point is reached, but in a fixed period model, orders are placed only at review time.  The inventory level, therefore, must be adjusted to prevent stockouts during the review and lead time.
  • Probabilistic Models and Service Coverage – these models take into account variations in lead times, demand and supply. 
  • Buffer or Safety Stocks and Service Levels – Holding a large amount of inventory to prevent stockouts is expensive.  Stockouts are unwanted as well.  Trade-offs between holding inventory and stockouts can be assessed quantitatively if accurate data is available, such as inventory carrying costs, stockout costs, as well as demand and supply variability.