Inventory is one of the most expensive and important assets to many companies, representing as much as 50% of total invested capital. Managers have long recognized that good inventory control is crucial. On one hand, a firm can try to reduce costs by reducing on-hand inventory levels. On the other hand, customers become dissatisfied when frequent inventory outages, called stockouts, occur. Thus, companies must make the balance between low and high inventory levels. As you would expect, cost minimization is the major factor in obtaining this delicate balance. Inventory is any stored resource that is used to satisfy a current or future need. Inventory is any stored resource that is used to satisfy a current or a future need. Raw materials, work-in-process, and finished goods are examples of inventory. Inventory levels for finished goods are a direct function of demand. When we determine the demand for completed clothes dryers, for example, it is possible to use this information to determine how much sheet metal, paint, electric motors, switches, and other raw materials and work-in-process are needed to produce the finished product. All organizations have some type of inventory planning and control system. A bank has methods to control its inventory of cash. A hospital has methods to control blood supplies and other important items. State and federal governments, schools, and virtually every manufacturing and production organization are concerned with inventory planning and control. Studying how organizations control their inventory is equivalent to studying how they achieve their objectives by supplying goods and services to their customers. Inventory is the common thread that ties all the functions and departments of the organization together. Figure 6.1 illustrates the basic components of an inventory planning and control system. The planning phase is concerned