FINANCIAL COST INCLUSIVE REFORMULATIONS OF INVENTORY LOT-SIZE MODELS

Inventory systems for deterministic demand have been extensively discu ssed in the literature. Generally, lot size models have been developed to minimize per-period total inventory costs. Financial management th eory, however, strongly suggests that the fundamental objective of man agement is to maximize shareholder wealth. Thus, in theory, inventory policy decisions should be made within a net present value, wealth max imization context. This paper reformulates the uniform replenishing ra te inventory model in a present value framework under two cash-flow sc enarios. In the first scenario, which is shown to be equivalent to the classical EOQ model, it is demonstrated that the classical EOQ method ology is consistent with the present value reformulation. In the secon d scenario. which is consistent with the classical uniform replenishin g rate model, the present value reformulation recommends substantially higher optimal order quantities than the classical model and provides insight about both the traditional methodology and future uses of the present value methodology. (C) 1998 Elsevier Science Ltd. All rights reserved.