According to Kostas7, the inventory system is basically an input-output system. In order to
arrive at the best inventory policy i.e. the best decision rules for when and how much to
order, it is necessary to have a clear picture of the inventory system.Regardless of the items held in stock, an inventory system requires specification of the
components shown in the input-output representation of figure 2.1; these include:
1. The demand pattern for items held in stock (i.e. the system output). The demand
side is the most critical yet uncontrollable components, for without demand, there
would be no need for maintaining inventory.
2. The replenishment pattern (the system input). The replenishment side represents the
controlIable component of the physical flow through an inventory system.
3. The operating constraints: Generally, the range of options for making the decisions
to operate an inventory system is limited by a number of restrictions relating to
limited warehouse, limited budget available for inventory etc. Occasionally,
replenishment may be limited by the suppliers policy to certain number of
quantities. Unless such constraints are taken into account explicitly it is difficult to
arrive at an optimum feasible inventory policy.