Optimum stock levels for excess inventory items

Insufficient attention has been focused on the ubiquitous problem of excess inventory levels. This paper develops two models of different complexity for determining if stock levels are economically unjustifiable and, if so, for determining inventory retention levels. The models indicate how much stock should be retained for regular use and how much should be disposed of at a salvage price for a given item. The solutions obtained by the two models are compared. The second model which includes a present value correction, tends to reduce the economic time supply to be retained, since repurchase costs and reorder costs are incurred in the future while salvage revenue and holding cost savings are realized immediately. Additionally, both models are used to derive a relationship to describe the minimum economic salvage value, which is the minimum salvage price for which excess inventory should be sold. The simple model, which does not correct for time values, can be used by any organization with the sophistication level to use an EOQ. The present value model which includes an inflation correction is more complex, but can readily be used on a microcomputer. These models are appropriate for independent demand items. It is believed that these models can reduce inventory investment and improve bottom line performance.