Question

1. What is the ultimate goal in inventory management?
2. List and discuss two major challenges making it difficult to achieve inventory management’s ultimate goal.
3. List and explain the two major assumptions of the EOQ model.

Answer 1

The main objective of inventory management is to maintain inventory at appropriate level to avoid excessive or shortage of inventory because both the cases are undesirable for business. Thus, management is faced with the following conflicting objectives:

1. To keep inventory at sufficiently high level to perform production and sales activities smoothly.

2. To minimize investment in inventory at minimum level to maximize profitability.

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Assumptions of EOQ model

• The rate of demand is constant, and total demand is known in advance.
• The ordering cost is constant.
• The unit price of inventory is constant, i.e., no discount is applied depending on order quantity.
• Delivery time is constant.
• Replacement of defective units is instantaneous.