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QUANTIFYING THE IMPACT OF INVENTORY HOLDING COST AND REACTIVE CAPACITY ON AN APPAREL MANUFACTURER'S PROFITABILITY
Author(s) -
RAMAN ANANTH,
KIM BOWON
Publication year - 2002
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/j.1937-5956.2002.tb00191.x
Subject(s) - stockout , profitability index , carrying cost , business , holding cost , capital cost , operational costs , clothing , industrial organization , operations management , total cost , environmental economics , economics , finance , marketing , archaeology , accounting , macroeconomics , history
This paper was motivated by the operational problems faced by Northco, a school uniform manufacturer in the Northeastern United States. Northco was facing high working capital costs while also incurring high stockout and markdown costs. This paper models the impact of inventory holding cost and reactive capacity on Northco's targeted understocking and overstocking cost and offers a solution methodology for such problems. We quantify the impact of varying inventory carrying costs (and hence, high working capital costs) on stockout costs and the value of additional capacity. Our results illustrate that apparel manufacturers with high working capital costs, and hence high inventory carrying costs, should target higher stockout costs and achieve lower capacity utilization. The results presented have application beyond Northco because high working capital cost is endemic to many supply chains.