Inventory: For retailers who buy from a distributor or manufacturer and sell to the public, a major concern is the cost of maintaining unsold inventory. You must have appropriate stock to do business, but if you order too much at a time, your profits may be eaten up by storage costs. One of the simplest tools for analysis of inventory costs is the basic order quantity model. It gives the yearly inventory expense E = E(c, N , Q, f ) when the following inventory and restocking cost factors are taken into account:
• The carrying cost c, which is the cost in dollars per year of keeping a single unsold item in your warehouse.
• The number N of this item that you expect to sell in 1 year.
• The number Q of items you order at a time.
• The fixed costs f in dollars of processing a restocking order to the manufacturer. (Note: This is not the cost of the order; the price of an item does not play a role here. Rather, f is the cost you would incur with any order of any size. It might include the cost of processing the paperwork, fixed costs you pay the manufacturer for each order, shipping charges that do not depend on the size of the order, the cost of counting your inventory, or the cost of cleaning and rearranging your warehouse in preparation for delivery.)
The relationship is given by