Evaluation of cost parameters for inventory control

Operations research models are important for the determination of optimal inventory control policies. Although different models have different characteristics, most of them aim to minimize the total cost which is a function of three main components: inventory carrying costs, order placement costs, and shortage costs. Accurate calculation of these cost components is important for the integrity of the model. Evaluation of cost parameters is difficult. We present methods for obtaining estimates of cost parameters used in inventory control decisions encountered in practical applications. The study is performed for developing a model to evaluate the inventory cost parameters of an automotive spare parts distributor and its retailers. The model is illustrated with a numerical example.