Optimal inventory policy for specialty chemical products in multiple packages

Many products are inventoried and sold in multiple outer packages, which causes the manufacturer or distributor to maintain a segmented inventory. Oftentimes, this scenario leads to shortages in some packages and over-stock in other package types. The shortages are usually linked to specific shortage costs, and the over-stock is always associated with some sort of unnecessary holding cost that either erodes profit margins or results in increased costs for the consumer. In this paper, the inventory policy for a specialty chemical manufacturer's cleaner, which is inventoried in four unique packages, is studied. A mathematical model is developed to account for the costs associated with initial procurement, holding and repackaging (shortage), which are the primary costs associated with the inventory system. Based upon this model, an optimal inventory policy is generated that reduces the need for repackaging, without requiring a prohibitive amount of safety stock. A specific historical case is summarized, and the results of this example are compared with the results that the new inventory policy would have produced, given the same circumstances.