Why this decision matters
Inventory is the most common place where strategy and arithmetic disagree. Strategy says "be lean." Arithmetic says "hold a few weeks because lead times are uncertain and stockouts cost ten times more than carrying cost." This module gives you both: the EOQ-and-safety-stock arithmetic to size each SKU, and the ABC framing to know which SKUs deserve which level of attention. MRP is the manufacturing companion — how the company decides what to order, when, and how much, given a bill of materials and a master schedule.
By the end of this topic you'll be able to
Compute EOQ, reorder point, and safety stock for a SKU and explain every input. Run an ABC analysis and defend a different policy per class. Read a bill of materials and walk an MRP gross-to-net plan through one level of explosion. Spot the failure modes — bullwhip, over-promising, hidden lead time, dependent vs. independent demand confusion.
Materials
Key concepts to know
- Independent vs. dependent demand — independent is forecast (finished goods); dependent is calculated (components).
- EOQ — √(2DS/H). Balances order cost (S) against holding cost (H).
- Reorder point — ROP = dL + safety stock. Place the order so you arrive at safety stock when the new batch comes in.
- Safety stock — buffer for demand and lead-time variability. Set by service-level target.
- ABC analysis — ~20% of SKUs drive ~80% of value (A). Different policy per class.
- Inventory turnover — COGS ÷ average inventory. Higher is leaner but riskier.
- Bill of materials (BOM) — the tree of components that make up a finished good.
- MRP logic — gross requirements → net (subtract on-hand and scheduled receipts) → planned order release (offset by lead time).
- Master production schedule (MPS) — the demand input MRP explodes.
Class notes & cheat sheets
- Operations Cheat HandbookZone 3 covers EOQ, safety stock, ABC, and MRP formulas.
- Inventory & MRP — Industry GuideHow inventory and MRP show up in real ERP implementations.
- Inventory Management Models — Deep ReferenceEOQ derivation, service-level math, multi-echelon notes.
Hands-on activity — SKU sizing & practice problems
- 50-SKU Inventory DatasetMedical-device SKUs — demand, cost, stock levels. ABC + EOQ end-to-end.
- Part 2 Practice Problems (Excel)A worked-problem set covering EOQ, ROP, MRP gross-to-net.
Self-check materials
- Part 2 Study GuideComprehensive review of Decisions 3–5.
- Practice AFull-length self-check.
- Practice BSecond version — use it once you've finished Practice A.
Practice with games · Inventory, MRP & supply-chain integration
- Inventory BossEOQ, ROP, and safety stock under pressure.
- MRP ExploderRun a BOM through MRP step by step.
- Supply Chain CommandIntegrate inventory with sourcing and capacity decisions.
- Xbox — Supply Chain CommandConsole-launch scenario, very on-the-nose for MRP.
- Hershey — Chocolate FactoryInventory and MRP at peak holiday demand.
- Ch 20 Inventory ReviewQ&A drilling for the inventory chapter.
- Ch 21 MRP ReviewQ&A drilling for the MRP chapter.
Using AI on this decision
AI is competent at the formulas, but the real value is in policy design: feed an SKU file and ask "given these holding costs, lead times, and service-level targets, propose a tiered policy — A items reviewed weekly, B monthly, C quarterly — and tell me what would change if lead time doubled." Always have it show the arithmetic.
Critical caution: AI will happily forecast independent demand for items that are actually dependent — double-check by asking "is this an end item or a component?" before any safety-stock work.