Introduction to Corporate Finance

Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

VII. Short−Term Financial

Planning and Management

21. Credit and Inventory
    Management

© The McGraw−Hill^759

Companies, 2002

732

FIGURE 21.6

Minimum

inventory

level

Delivery time

C. Combined reorder points and safety stocks

Safety

stock Delivery time

By combining safety stocks and reorder points, the firm maintains a buffer against unforeseen

events.

Inventory

(units)

Time

Reorder point

Inventory

(units)

Time

B. Reorder points

When there are lags in delivery or production times, the firm reorders when inventory reaches

the reorder point.

Delivery time

Reorder point

Delivery time

Inventory A. Safety stocks

(units)

Safety

stock

With a safety stock, the firm reorders when inventory reaches a minimum level.

Minimum

inventory

level

Time

Safety Stocks and Reorder Points