Here inventory levels are shown on the vertical axis and time on the horizontal axis. The diagram is used for
• Some basic inventory calculations
• Determining inventory cost
• Illustrating the tradeoffs between inventory cost and order costs
• Illustrating the tradeoffs between inventory cost and transportation costs
• Illustrating the tradeoffs between inventory cost and lost sales
Here in this diagram it is assumed that the inventory is depleting at a constant rate and no uncertainties are there in demand. The maximum inventory depletes until the new inventory is available and the cycle continues. The diagram is a theoretical guide and practical tool of managing the inventory of a firm. A demand of 100 is kept as a buffer in case of high demand or low supplies. The diagram is also known as stock control chart.
• Here the inventory is consumed at a constant rate. Now when the inventory reaches the level of 400 units, a new order is placed. This is called the Re-order Point. The new inventory is received at the inventory level of 200 units which is called the buffer stock. The time between the reorder points to the inventory receiving point is called Lead Time. Now the inventory goes to the level of the Lot-Size (The quantity ordered in the lot).