AGGREGATE INVENTORY MANAGEMENT
It was previously mentioned that inventory is defined as a policy and an item. The
discussion to this point has viewed inventory as an item. Any inventory control
system must assure customer satisfaction, maximum facilities utilisation, and efficient
manpower utilisation at the least cost. In order to balance these often conflicting
objectives, several tools called Management Policy Variables are available to manipulate
the inventory to meet inventory policies and objectives. Management must select an
inventory strategy, but first they should be aware of the overall effects of a range of
management policy variables. The trade-offs between conflicting objectives is best
observed by the use of exchange curves. It is possible to adapt the inventory to fit
any new policy constraints. When the policy variables are changed, the composition
of the inventory will probably not change immediately as each inventory has its
own characteristics and response time.
There are four management policy variables that can be used to manipulate inventory
levels in order to accomplish the inventory policies and objectives. They are
carrying cost (I), stockout cost (B), safety factor (K), and service level. They control
the trade-offs between the amount of capital invested in inventory, and operating
costs as a measure of service. These variables can be used to test various ranges and
combinations of the variables as one basis for inventory policies, or they can set as
policy the values of the variable to be used in maintaining inventory levels to meet the
inventory policies. Management can use the policy variables in both ways. The
variables are of two types. They are: