📘 Keep inventory from meaning leftover junk

What you’ll learn

1. What Inventory Is and Why It ExistsDefine inventory as a deliberate buffer, classify it by stage and by function, and frame holding versus shortage cost as an optimization, not a minimization.Inventory is idle stock held because lead time, demand uncertainty, or batch economics will not go away. IAS 2 names three asset situations — materials, work-in-process, finished goods. Function is a separate question: cycle, safety, pipeline, or anticipation. Holding cost is an annual rate H that bundles capital, storage, insurance, and risk. Shortage cost is often replaced by a service-level target. The job is the least-total-cost point on that scale.
2. How Much to Order: The Economic Order QuantityDerive the EOQ that minimizes the sum of annual ordering and holding cost, check it at the equality of those two costs, and know when the assumptions fail.Harris asked in 1913 how many parts to make at once. With steady known demand, Q* = √(2DS/H) minimizes TC(Q) = (D/Q)S + (Q/2)H, and at that Q the two annual costs are equal. The square-root form makes the policy robust to rough inputs. NC State lists the usual assumptions — uniform known demand, fixed costs, constant lead time — and notes the model is still a good check when they do not hold exactly.
3. When to Order: Reorder Points, Safety Stock, and Service LevelSet a reorder point as expected lead-time demand plus a safety buffer sized from a cycle service level and the variability of demand over the lead time.EOQ answers how much; the reorder point answers when. In the certainty case ROP = d × L. Under uncertainty, ROP = d × L + ss, with ss = z × σd × √L when demand is the variable and periods are independent. Cycle service level is the probability of no stockout in a cycle; NC State's typical z values are about 1.29 / 1.65 / 2.33 at 90 / 95 / 99 percent. The last points of service are the most expensive stock you will hold.
4. Inventory Performance and Building Your Mini Policy ArtifactRead a policy through turnover, days-of-inventory, and Little's Law, aim effort with ABC, then write a reproducible policy for one item and leave with a question that would change it.Turnover is COGS over average inventory; DIO is 365 over turnover, or average inventory over COGS per day (CFA Institute). Little's Law (L = λW, 1961) says average inventory equals throughput times flow time, so with throughput fixed the only way to cut stock is to shorten flow time. ABC sends the quantitative tools at the few high-dollar items. The artifact is one item, labeled inputs, EOQ, safety stock, reorder point, and one outcome metric. Tonight: pick a SKU you can see.

Grounded in trusted sources

• IAS 2 Inventories — definition and classifications — IFRS Foundation
• Economic Order Quantity (EOQ) Model — Inventory Management Models: A Tutorial — NC State Supply Chain Resource Cooperative
• Safety Stock Analysis — Inventory Management Models: A Tutorial — NC State Supply Chain Resource Cooperative
• A Proof for the Queuing Formula: L = λW — Operations Research / INFORMS (Little, 1961)
• Little's Law as Viewed on Its 50th Anniversary — Operations Research 59(3), reprinted by the Project Production Institute
• A Look at the Cash Conversion Cycle — CFA Institute
• How Many Parts to Make at Once (1913 reprint) — Operations Research / INFORMS (Harris, 1913; reprint 1990)
• IFRS Foundation — IAS 2 Inventories, paragraphs 6 and 8

Every Wunder lesson is built from real, reputable sources — never invented.

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