Cost Optimization and Mathematical Modeling Solution to Stochastic Processes in Inventory Systems

Abstract

newline For an industry, management of the inventory of finished goods or goods to be sold is very crucial. One of the important aspects of financial analysis is the inventory turnovers for SME companies. This forms a major base for decisions of the firm s management. Considering the Linear and Hyperbolic Cost Functions, the values of quantity and corresponding profits are compared. By traditional theory of inventory, it is believes that high turn over results in stock outs and low turn over leaves high unused and outdated stock to be maintained. Thus, an effective inventory management should focus on maintaining a balance between different levels of inventory. This research looks into the development of an analytical model for optimization of turnover ratio under well managed inventory keeping in mind the upcoming production industry. The model in this thesis aims at optimizing average annual total cost and the optimum quantity of inventory, to attain maximum turnover ratio depending on various cost of involved in inventory maintenance like holding cost, procurement cost, operating cost etc. Secondly, the thesis discusses about formulation of average annual total cost function under Inventory Management Policy which can be used for effective supply chain. The results of the models are justified using comparison of initial and final values in a hypothetical problem and graphs.