Abstract In many business management policies, the inventory management and decision - makings have been the very important of the business administration. The object of the inventory management is satisfy the customer demand with minimum inventory cost; and the inventory policy is how to decide the quantity or timing of every order times, that can reach the object of the inventory management. Today aims at the supervision strategy of the business inventory system, is still to make use of mathematics and statistics computational method, compute the most economic order quantity (EOQ), the best opportune moment of reorder point (ROP). However the item of the inventory cost that have got trade off relation, inventory service level setting that also have got trade off relation with the total inventory cost. The different inventory policy relates to the different stockholding cost assemble, all operators of the business practice is looking for the balance point between service and cost, the complex relation in this dynamic state, is not a general intuition thinking, simple computing criterion, can acquire among the best solution. So this paper makes use of the System Dynamics simulation tool that is good to solve of the complex problem tool, establish the System Dynamics (SD) model, and aim at the inventory policy, inventory cost, service level setting and out-of-stock strategy to do the system simulation analysis application. Through the study of this paper, can induce following research results: 1. This paper create a System Dynamics (SD) model that can analyze the dynamic relationship between the inventory policy and inventory cost , this model includes the fundamental inventory policy, each related cost of inventory, evaluation the performance of the inventory policy etc. 2. The dynamic model that via this paper create, among the different inventory policy, explore the situation of change of the individual of inventory cost, and analyze the dynamic state of the inventory cost assemble, service level setting and businesses to operate the performance change. 3. Study of that none shortage cost and make use of the stockout strategy to reduce other inventory costs, under the different scenario of the sales, the different ABC class of the goods, applied different inventory cost combine and the setting strategy of the service level, do the dynamic state simulation analysis for business performance. 4. Study of the impact of the business, when the business at the service level set and stockout strategy usage is not appropriate. Keyword: System Dynamics, Inventory Policy, Inventory Cost, Service level, Stockout Strategy