Shruti Speak's

Inventory theory is concerned with the design of inventory systems to minimize costs. Observation of almost any company balance sheet reveals that a very significant part of its assets comprise inventories of raw materials, products within the production process, or finished products. How do companies use operations research to improve their inventory policy for when and how much to replenish their inventory? They use scientific inventory management comprising of the following steps: 1. Formulate a mathematical model describing the behavior of the inventory system. 2. Seek an optimal inventory policy with respect to this model. 3. Use a computerized information processing system to maintain a record of the current inventory levels. 4. Using this record of current inventory levels, apply the optimal inventory policy to signal when and how much to replenish inventory. The mathematical inventory models used with this approach can be divided into two broad categories—