Introduction to Corporate Finance

(avery) #1
Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate Edition

VII. Short−Term Financial
Planning and Management


  1. 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
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