Inventory Policy Under Certainty

Abstract

Inventories of raw materials, work-in-process, and finished goods are ubiquitous in firms engaged in production and/or distribution of one or more products. Indeed, in the United States alone, 1982 non-farm business inventories totalled over 500 billion dollars, or about 17 per cent of the gross national product that year. The annual cost of carrying these inventories, e.g., costs associated with capital, storage, taxes, insurance, etc., is significant – perhaps 25 per cent of the total investment in inventories, or about 125 billion dollars. Since the cost of carrying inventories is sizeable, a good deal of attention has been devoted to the problem of determining optimal or near-optimal inventory policies that properly balance the costs and benefits of carrying inventories. Moreover, since a firm’s inventories are usually distributed among several facilities, e.g., plants, warehouses, retail outlets, effectively coordinating the inventory policies in multi-facility systems.