Final Answer:
The two fundamental decisions that inventory analysts make to achieve satisfactory levels of customer service while keeping inventory costs reasonable are determining the optimal reorder point and setting the appropriate reorder quantity.
Step-by-step explanation:
Inventory management involves finding a balance between ensuring product availability for customers and minimizing holding costs. The first critical decision is establishing the optimal reorder point (ROP). ROP is the inventory level at which a new order should be placed to avoid stockouts. It is calculated by multiplying the average demand per period by the lead time in periods.
Mathematically expressed as ROP = (Average Demand per Period) × (Lead Time in Periods). For example, if the average demand is 100 units per week and the lead time is 2 weeks, the ROP would be 200 units. This ensures that a new order is placed just in time to replenish inventory before it runs out, optimizing customer service without excessive holding costs.
The second crucial decision is determining the reorder quantity (EOQ), which represents the optimal order size to minimize total inventory costs. EOQ minimizes the sum of ordering costs and holding costs. Mathematically expressed as EOQ = sqrt((2 × Demand × Ordering Cost) / Holding Cost per Unit), where Demand is the annual demand, Ordering Cost is the cost to place an order, and Holding Cost per Unit is the cost to hold one unit in inventory for a year. This decision ensures efficiency in restocking, preventing overstocking or understocking. By striking the right balance between reorder point and reorder quantity, inventory analysts can achieve high customer service levels while managing costs effectively.
In conclusion, the interplay between optimal reorder point and reorder quantity is essential for effective inventory management. By utilizing these two key decisions, analysts can ensure that products are available when customers need them while avoiding unnecessary holding costs, contributing to overall operational efficiency and customer satisfaction.