Chapter 30, Problem 1PS

Inventory What are the trade-offs involved in the decision of how much inventory the firm should carry?

Summary Introduction

To discuss: Principles of trade-off involved in the decisions of holding inventory of firm.

Explanation of Solution

The principle of trade-offs involved in the decisions of holding inventory. The following are the benefits and disadvantages of holding inventory.

Benefits of holding inventory:

• Lowering the cost of ordering.
• Higher buffer for demand variability.
• It helps the batch production to runs at lower cost per unit.

Disadvantages of holding inventory:

• It increases the storage and insurance costs.
• There is a chance of risk of spoilage or obsolescence.
• The opportunity cost of capital stored in the inventory.

Thus, these are the benefits and disadvantages of holding the inventory.