This model calculates four key values used in inventory management
1. Inventory Safety Stock. This is the amount of inventory which should be on hand when a new shippment of goods arrives or batch of goods completes production. This value depends upon: how much risk of running out of stock in a given reorder period the business is willing to bear, the amount of estimated future sales and the standard deviation of those sales. In this model, as the volatility of sales decreases over time, so does the standard deviation, and the safety stock required.
2. Economic Order Quantity. This is the minimum size of orders which it makes sense to purchase given the cost of holding inventory and the cost of processing an order, or, the minimum production run which it makes sense to build given the cost of holding inventory and the cost to set up a production run.
3. Inventory Service Level. This is percentage of days during which an order will be filled from inventory, given: average sales levels, the standard deviation of sales, the inventory re-order point and the economic order quantity.
4. Inventory Re-order point. The point at which a new shipment should be ordered or a new production run started, given the acceptable risk of running out in a given re-order period, the average projected sales, and the standard deviation of those sales.
