Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate Edition
VII. Short−Term Financial
Planning and Management
- 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