Document Type

Thesis - Open Access

Award Date


Degree Name

Master of Science (MS)

Department / School

Mechanical Engineering


The problem of the control and maintenance of inventories of physical goods is common to most enterprises. In the past, inventories were considered as the 'graveyard' of American business, because surplus stock was a principal cause for business failures. However, in large scale enterprises the inventory system may become too large and complex to be analyzed intuitively and any deviation from the optimum inventory policy would mean substantial losses. As a result of the current small profit margins, proper inventory control has become even more important. The basic concept in inventory control consists of striking a balance between the cost factors which increase as inventories increase and those which decrease as inventories increase. Among the costs which increase are: 1. Interest: (cost of money) Some companies use the interest paid for the capital and others use the return that could have been obtained by investing the capital elsewhere. In either case, the cost of the goods in inventory must be considered. 2. Deterioration costs. Deterioration costs are the losses in value due to actual deterioration, obsolescence or damage of the inventory item. 3. Insurance and taxes. Since most inventories are insured, this cost should be taken into account. Taxes are mainly property taxes. 4. Storage costs. Storage costs include rent, or its equivalent ownership costs, and heat, light and other utility costs. It is the usual practice to combine-all of these costs into a single item called the holding cost or inventory carrying cost, expressed as a percentage of the factory or purchase cost of the items being stored. The decreasing costs are: 1. Ordering cost. The ordering cost is the internal cost incurred in placing and processing a purchase order and is usually assumed to be a constant for each order placed. It would include cost of forms, cost of preparation and, frequently, receiving inspection. 2. Set up costs. The set-up costs are the costs incurred in preparing a machine for the production of an item. It is applicable to items produced internally. This cost is a constant for each set up. 3. Shortage cost. The shortage cost is the cost incurred due to the non-availability of an item in stock. This cost would include the additional cost involved in taking emergency measures to meet the demand in time as well as the loss of customers' good will and positive loss of profit if the demand is not met in time. If a company keeps a spare parts inventory for its own use, the shortage may result in direct losses if a machine becomes inoperative due to the non-availability of spare parts in stock. The shortage cost may depend upon the amount of the. shortage, the duration of the shortage and/or the number of shortages per unit time.

Library of Congress Subject Headings

Stores or stock-room keeping



Number of Pages



South Dakota State University