Inventory replenishment systems

The aim of an effective inventory replenishment system is to maintain a suitable balance between the costs of holding slack and the particular service requirement for customers. The need for this balance can be illustrated by considering the disadvantages of low stock levels (which should provide very low costs) and high stock levels (which should provide a very high service).

The disadvantages of low stock levels are that customers' orders cannot be immediately fulfilled, which may lead to the loss of both existing and future business, and that goods have to be ordered very frequently, which may lead to heavy ordering costs and heavy handling and delivery costs. High stock level have a major disadvantage because capital is tied up that might be better invested elsewhere. Also, there is the risk of product deterioration (e. g. food and drink) and of products becoming outdated, superseded or obsolete if they are stored for a long period of time (e. g. computers, mobile phones and fashion goods). A final disadvantage, previously discussed is the expense of providing additional storage space.

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