Inventory Strategy

An inventory strategy is a plan or approach that a business uses to manage its inventory levels, types, and flow of goods. The goal of an inventory strategy is to ensure that the right amount of inventory is available at the right time to meet customer demand while minimizing costs associated with holding and managing inventory.

Key Terms

• Service Level
  • There are various definitions for service level, so we focus on in-stock rate.
• Inventory-related Costs:
  • Ordering Cost
  • Stockout Cost
  • Inventory Carrying Cost
  • Shrinkage Cost
  • Obsolescence Cost
• Stock-Keeping Unit (SKU)
• Inventory Turns and Days of Inventory

Model Selection

So there’s a few inventory strategy models we can choose from, and there’s two questions we need to ask in order to decide which one to use.

1. Can we replenish inventory within a single selling period? That is, based on the nature of the product and the procurement lead times, is it feasible to be reactive to demand to order more inventory, or do I need to plan ahead and stock up in advance for the entire selling period?
2. If the above is true, how often are inventory levels assessed? That is:
   1. Continuous review (always monitoring inventory levels)
   2. Periodic review (checking inventory levels at fixed intervals)

Models

• Newsvendor Model