Inventory Policy Decisions

Inventory policy is a rule of replenishment and can cause great impacts on a firm. Therefore, inventory policy decisions should be made well in a firm. When the decisions are well made, inventory will be a resource of value to the firm. However, if not well made, inventory can result to being a source of waste for the firm. According to Coyle, et al. (2008) the inventory policy decisions comprise of various factors. For instance, a firm has to consider where and the amount of inventory to be ordered and kept. Holding of too high inventories will result to holding costs in terms of risks, space, service and the inventory management. On the other hand, keeping too little inventory leads to business loss through dissatisfaction of customers. Decisions also consist of the time to order replenishment and thus maintain the level of service of the firm. Further, this helps in avoiding emergency orders.

When making inventory policy decisions, a firm has to consider some costs. An example of these costs is the inventory carrying costs. These are costs that the firm will incur at the time when the inventory awaits use (Coyle, et al., 2008). This then helps in ensuring that only relevant inventory is ordered. Order cost is also considered. This is the cost that is associated with the expenses incurred when making orders. Therefore, this is an important decision since it helps reduce costs that would have been incurred by making frequent orders that would otherwise have been made at once. Thus, just the same way that a firm will make investment decisions, they have to make inventory decisions. This ensures good inventory management and thus reduction of unnecessary costs.

Reference

Coyle, C.J. et al., (2008). Supply chain management: a logistics perspective. 8^th Ed. USA: Cengage Learning publishers.

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