How do you compare different inventory policies using sensitivity analysis?

2 How to perform sensitivity analysis?

Sensitivity analysis involves changing one or more input parameters of an inventory policy and observing the resulting changes in the output measures, such as total cost, order quantity, inventory level, and ROI. You can use a spreadsheet or a software tool to perform sensitivity analysis and create charts or tables to visualize the results. For example, you can create a sensitivity table that shows how the total cost of EOQ and IRR vary with different values of demand, holding cost, and ordering cost.

3 How to compare EOQ and IRR?

To compare EOQ and IRR, you need to use the same input parameters and output measures for both policies. You can then compare the results of sensitivity analysis and see which policy performs better under different scenarios. For example, you can compare the total cost, order quantity, inventory level, and ROI of EOQ and IRR for different values of demand, holding cost, and ordering cost. You can also compare the sensitivity of each policy to changes in the input parameters and see which policy is more robust or flexible.

4 How to interpret sensitivity analysis?

Sensitivity analysis can assist in understanding the trade-offs and implications of different inventory policies to make informed decisions. It is useful in answering questions such as how demand uncertainty affects the total cost and return on investment of economic order quantity and inventory replenishment rules. Additionally, sensitivity analysis can be used to determine how holding cost affects the order quantity and inventory level of EOQ and IRR, as well as how ordering cost impacts the frequency and size of orders of EOQ and IRR. It can also help you understand the effect lead time has on safety stock and service level of EOQ and IRR, as well as how the discount rate affects the return on investment and inventory replenishment rules.

5 How to apply sensitivity analysis?

Sensitivity analysis can be used to determine the best inventory policy for your business based on goals and constraints. It allows you to identify the optimal values of input parameters that minimize total cost or maximize ROI, as well as evaluate the impact of changes in input parameters on performance and profitability. Additionally, it can be used to compare the advantages and disadvantages of different inventory policies and select the one that best suits your needs. Finally, it can test the robustness and flexibility of your inventory policy, so that you can adjust it accordingly.