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Objective Function

The objective function defines what an optimization model is trying to maximise or minimise when choosing between feasible solutions. In inventory and replenishment problems, objective functions may focus on different outcomes, such as minimising storage costs, avoiding stockouts, or maintaining target inventory levels.

Why It Matters

  • •Different objective functions lead to very different replenishment decisions, even under the same constraints.
  • •Operational objectives optimise local outcomes, while capital-focused objectives optimise financial performance.
  • •Making the objective explicit is essential for understanding why a model produces certain recommendations.
  • •The objective function evaluates outcomes across feasible combinations, not individual SKUs.

Connection to Capital

Optimization is required when capital is limited. It determines how to allocate working capital across SKUs to optimize a chosen objective function (e.g., maximize expected return on investment, minimize cost, or balance service level vs. capital use).

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