Chapter 9, Problem 3AME

Summary Introduction

Interpretation: The inter-relationship of the various costs related to inventory management should be concluded.

Concept Introduction: Inventory is created by ordering to the supplier. This has a cost called the ordering cost. Further, the inventory costs:

1. To hold the stocks in spaces, storing and handling, etc.
2. The capital locked in the inventory value has an interest cost associated with it.

Both these costs are called the holding costs (for the inventory).

Both the costs together i.e. the ordering and the holding costs are the total costs involved for inventory management. This total cost needs to be minimized/optimized.

It is very important to understand the behaviors of these costs with respect to each other.