Holding costs under push or pull conditions - The impact of the Anchor Point

Abstract

Holding costs are traditionally determined from the investment in physical stock during a cycle. An alternative approach instead derives holding costs from Net Present Value (NPV) functions. It is known that applying both frameworks to the same system can lead to different holding cost valuations, but little explanation has been offered. By introducing the Anchor Point in a model, this paper shows, for four different systems, that traditional holding cost models (implicitly) assume pull conditions, while current NPV approaches model push conditions. This explains in part the differences between the methods. It is shown that the Anchor Point concept allows the construction of NPV models under pull conditions, giving results in better correspondence with traditional models. The traditional framework is restricted to pull conditions and important considerations could be easily overlooked, leading to wrong valuations of holding costs. NPV seems superior as such considerations are automatically incorporated. The application to multi-echelon inventory systems provides interesting insights on the roles of echelon stocks and lead-times, and offers potential for future research. (C) 2011 Elsevier B.V. All rights reserved.