Managing your working capital cycle can often become difficult to to difficult in offloading stock. There are many variables that need to be examined when analysing the most effective management of inventory as results can vary industry to industry. The main idea of inventory management is to maintain costs at as low of a level as possible which can be achieved not only holding low levels but could also be accomplished through holding high level. This can be attributed to the high costs associated with both high and low level of inventory as high levels lead to high finance costs due to the large amount of stock required, large storage cost and potential for stock to become damaged or losing popularity. On the flip side, low levels of inventory can struggle to meet demand and therefore, losing sales, having higher ordering and delivery costs in order to resupply their low levels, and potential to miss out on bulk discount to frequent smaller orders,
A model known as the Economic order quantity can be utilised to establish the ideal level of inventory to order based on three factors: finance costs, storage costs, and delivery costs. Implementing all 3 different types of cost within the model returns an optimal storage level for the lowest possible costs whilst also factoring in any discount above specific order quantities if necessary.