A Net Present Value Framework for Inventory Analysis

The literature of traditional inventory analysis contains primarily cost minimisation models. These models avoid the interface of marketing and finance with logistics through constraints and a combined logistics/marketing/finance objective of maximising firm's profit. Under certain conditions, the cost minimisation models will give the same results as the profit maximising results; however, if such conditions do not hold, the cost minimisation models may give results which are different from the profit maximising results. Such is the case when sales lot size for batch sales) decisions are analysed within a cost minimising framework. A proper framework based on discounted cash flow analysis as prescribed by finance theory is developed in this article. A numerical illustration is also presented.