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406 CHAPTER 10 INVENTORY MODELS

MANAGEMENT SCIENCE IN ACTION

Ford-Otasan
ord-Otasan, based in Turkey, produces commer- vehicles. The improvement team tasked with deliver-
F cial motor vehicles for the home and European ing the reduced stock level target initiated a project
markets. The company was established in 1998 as a to improve the existing processes and also devel-
joint venture between Ford Motors and the Turkish oped an integer programming model for production.
company, Koc Holdings. Initially production was Finished-vehicle stocks reduced considerably from
aimed at the local domestic market but, over time, an average daily level of 1070 down to 550 and there
production increased and the number of models was also improved consistency in monthly stock
increased. Export markets were targeted. Partly levels. Using the average vehicle price and the
as a result, finished-vehicle stocks increased also. monthly interest rate to calculate holding cost, the
Finished-vehicle stocks comprise vehicles ready for average monthly holding cost is estimated to have
shipment. The company’s management set a target been cut by around $150 000.
for finished-vehicle stock levels equivalent to 2½
Based on M. Denizel, U. Ekinci, G. Ozyurt and D. Turhan, ‘Ford-Otosan
days’ production (around 900 vehicles). This was a
optimizes its stocks using a six-sigma framework’, Interfaces 37 2
challenging target given that stock levels were typi- (2007): 97–107.
cally at least three days’ production at over 1000

Inventory, or stock, is held by just about every type of organization from the local
corner shop which has extra supplies in the back room through to the large multi-
national. Inventory refers to goods or materials held by an organization for future
use and might include raw materials, parts from suppliers and semi-finished prod-
ucts as well as finished goods awaiting sale or shipment. Keeping inventory can be
very expensive for organizations but, on the other hand, running out of stock can be
just as problematic so there is little surprise that inventory models are an important
area for management science.

10.1 Principles of Inventory Management

Every organization holds inventory in one form or another: this may range from
boxes of paperclips kept in the office through to replacement engine parts for a
jumbojet airliner. Managing this inventory effectively has attracted considerable
attention from management scientists and in this section we outline some of the
key principles involved.

The Role of Inventory
Organizations hold inventory for a number of reasons, one of the most important
being to meet customer demand for a product or service where that demand has a
degree of uncertainty. If a large retail organization such as Gap knew for certain that
an item in its new fashion range would sell exactly 40 000 units then it would know
exactly how many units to orders from its suppliers. However, because demand will
not be known for certain, no matter how good our forecasting, the company will
hold additional amounts of inventory known as buffer or safety stocks in case
customer demand is higher than expected. If it doesn’t hold such buffer stocks then

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