Manager decide the appropriate service level

How should a manager decide the appropriate service level for finished goods items? Should some items have a 100 percent service level? The appropriate service level for finished goods items depends on a number of factors, including the cost of carrying inventory, the cost of stockouts, and the importance of the item to the customer. In general, items that are more important to the customer or that have a higher cost of stockout should have a higher service level. Some items may require a 100% service level, such as critical spare parts for a manufacturing process. In these cases, the cost of a stockout is too high to justify carrying less inventory. However, most items do not require a 100% service level. For these items, the manager can trade off the cost of carrying inventory against the cost of stockouts to determine the optimal service level. What is the appropriate role of inventory turnover as a measure for evaluating the management of inventory? Under what circumstances is high turnover detrimental to a firm? Inventory turnover is a measure of how quickly inventory is sold or used. It is calculated by dividing the cost of goods sold by the average inventory. A high inventory turnover rate indicates that inventory is being sold or used quickly. Inventory turnover can be a useful measure for evaluating the management of inventory. However, it is important to consider other factors, such as the cost of carrying inventory and the level of customer service, when evaluating inventory management. High inventory turnover can be detrimental to a firm under certain circumstances. For example, if a firm has a high inventory turnover rate but also a high cost of carrying inventory, then the firm may be losing money on its inventory. Additionally, if a firm has a high inventory turnover rate but is not meeting customer demand, then the firm may be losing sales. In general, a moderate inventory turnover rate is ideal. This means that inventory is being sold or used quickly, but the cost of carrying inventory is not too high. Here are some additional factors that should be considered when evaluating inventory management:

• The cost of ordering inventory
• The cost of storing inventory
• The cost of stockouts
• The level of customer service
• The demand for the product
• The lead time for ordering inventory

By considering all of these factors, managers can make informed decisions about how to manage their inventory.    

Sample Solution

The appropriate service level for finished goods items depends on a number of factors, including the cost of carrying inventory,