Abstract: A system and method for merchandise inventory management to maximize gross margin is disclosed. In one embodiment, the method includes modeling inventory to maximize gross margin as a function of replenishment of each item in each location based on optimum customer service level. Further, a desired customer service level range is determined. Furthermore, a safety stock level is computed for each customer service level in the determined customer service level range based on supplier information and forecasted future demand. In addition, replenishment quantity is computed for each customer service level in the determined customer service level range based on the computed safety stock level, lost sales information, markdown costs, and economic order quantity. Moreover, gross margin is computed for each customer service level in the determined customer service level range based on the computed replenishment quantity, markdown schedule and other financial information.