Inventory Management Logistics costs are equal to about 10% of US GDP. They also represent approximately 8-10% of the typical company's cost of goods sold. Inventory including raw materials, work-in-process, finished goods, and pipeline -is the largest component of logistics costs. In addition to driving costs, inventory influences customer service. Simply stated, too much inventory and a company cannot be cost competitive. Too little inventory and the company will not be responsive to customer expectations. To effectively manage inventory levels, two critical decisions must be made: 1) how much inventory to order (or make) and 2) when to order (or make) product How Much to Order The amount of inventory to order-called the economic order quantity (EOa)-is calculated to minimize the total annual costs of inventory. Two cost categories are typically included in the total cost equation: 1) Ordering Costs and 2) Carrying Costs . Ordering costs are calculated by multiplying the number of orders per year (Annual Demand (D) Order Quantity (Q)) by the cost per order (K). . Carrying costs are calculated by multiplying the average inventory on hand (Q/2) by the cost of holding (H). The carrying cost rate is typically a combination of interest rate plus a percent costs attributed to 9 obsolescence and other costs. We define the EOQ equation by taking the derivative of the total annual cost equation, setting it equal to zero, and solving for Q. That is Total Annual Inventory Costs (D/Q) K+ (Q/2) H. EoQ v2DKH We will do the math in class. When to Order Orders should be placed so that the new order arrives before existing inventory runs out When to orde