Category Archives: Inventory Systems for Independent Demand

Independent versus Dependent Demand

Independent versus Dependent Demand

Briefly. the distinction between independent and dependent demand is this: With independent demand. the demands for various items are unrelated to each other and therefore the required quantities of each must be determined separately or independently. With dependent demand (which is addressed in detail in the next chapter). the requirement for any  one item is a direct result of the need for some other item. usually a higher-level item of which it is a componen1 or subassembly. In concept. dependent demand is a relatively straightforward computational problem. The required quantities of a dependent-demand item are simply computed, based on the number needed in each higher-level item where it is used. For example, if an automobile company plans on producing 500 automobiles per day, then obviously it will need 2,000  wheels and tires (plus spares). The number of wheels and tires needed is dependent on the production  level for automobiles and not derived separately. The demand for automobiles,  on the other hand. is independent-it comes from many sources external to the automobile firm and is not a part of other product and so is unrelated to the demand for other products. To determine the quantity of independent items that must be produced, firms usually turn to their sales and market research departments. They use a variety of techniques, in- . c1uding customer surveys. forecasting techniques, and economic and sociological trends. Because independent demand is uncertain. extra uni.ts must be carried in inventory.

COMPANIES WRITE OFF MILLIONS OF DOLLARS IN OB- SO(,LETe. INVENTORIES

COMPANIES WRITE  OFF MILLIONS OFDOLLARS IN OB- SO INVENTORIES

During the economic slowdown of 2000-2001 (also referred  to by some as a recession). many high-technology companies had to write off significant amounts of obsolete inventories  These inventories were the result of the inability of these firms' managers to anticipate the economic downturn and its associated decrease in sales. These
excessive inventories occurred at all levels of the supply chain, including semiconductor manufacturers, electronic
contract manufacturers, and PC makers. According to Steve Ward, general manager for IBM's Global sector .

inventory instead of short-term notes. If the firm has an alternative project to invest in, then the capital cost is the opportunity cost of the anticipated return of that project. If the firm has to borrow funds to maintain an inventory, then the capital cost is the interest paid on these funds. Obsolescence costs recognize that products tend to depreciate in value over time. This is especially true in high-technology industries where newer and better (and often cheaper) products are constantly being introduced. In this ca egory. we also include spoilage costs associated  with: products that have a short shelf life. like pen'stable food products and some types of prescription drugs. Shrinkage costs track pilferage and breakage.

     

    Inventory Costs

    Inventory Costs

    In making any decision with respect to inventories, the following costs should be taken into consideration:

    Holding or Carrying Costs Thi broad category i usually subdivided into three segments: storage costs. capital costs. and obsolete cents/shrinkage cots. Storage costs include the cost of the storage facility in the form of rent or depreciation. insurance, taxes, utilities,  security. and facility personnel.Capital costs can vary, depending on the firm's financial situation. For example. if the firm has an excess of cash, then the capital co title interest lost by putting the money into

    Reasons for Maintaining Inventory

    Reasons for Maintaining Inventory

    Organizations maintain inventories for several reasons. These include
    1. To protect against uncertainty. For purposes of inventory management. we examine uncertainty in three areas. First. there i~ uncertainty with re'pel'! to ra« materials. which necessitates raw material inventory. Here. uncertainty pert.un-, both  to the lead time that can vary due to unexpected delays and to (he amount of raw material  received.

    Uncertainty also occurs in the transformation process. Here work-in-process (WIP) inventories absorb the variability that exist between of the ~races. thereby providing independence between operations and improving efficiency. In addition. this WIP inventory can be used to cl'le the stages in a process..sect to the demand for a firm's finished products. the demand for a product were to be known precisely. then it could be possible to manufacture product so that demand would be exactly met. However, more often demand is not totally known, and a safety stock of finished goods inventory is therefore maintained to absorb these variations.

    ]the previous chapter on aggregate planning. when a firm adopts a level strategy, an inventory of finished goods i required to buffer the cycle   demand for product from the level output generated by the transformation process. Under these circumstances. when demand exceeds production.  he difference i withdrawn from inventory: when demand is less than production. the difference  i placed back into inventory. To take advantage of economies of  scale. Each time we place an order or do a setup to perform an operation, we incur a fixed cost, regardless of the quantity involved. Thus; the larger the quantity ordered or produced. the lower the average total cost per unit. However, as we shall see  shortly. there are trade-offs to be considered in determining the proper lot size.In addition. companies often offer discounts for larger-quantity orders. as an  incentive to customers to buy more than the  normally would. This results in accumulations of items that otherwise e would not exist. Firms offer quantity discounts for several reasons, including the need to reduce excessive stockpiles and to generate positive cash flow. In addition, there are  economies of scale with respect  to transportation costs, especially when products are shipped in either full
    t railer loads or full car load').

    Definition of Inventory

    Definition of Inventory

    Inventory is defined as the stock of any item or resource used in an organization. An inventory management system is the set of policies and controls that monitors levels of inventory and determines (a) what levels should be maintained, (b) when stock should be replete hed.  and (c) how large orders should be.In a broader context. inventory can include inputs such as human. financial. energy, equipment, and physical items such as raw materials; outputs such as parts. components, and, finished goods; and interim stages of the process. such as partially finished good or  work-in-process (WIP). The choice of which items to include in inventory depend on the organization. A manufacturing operation can have an inventory of personnel. machines. and working capital. as well as raw materials and finished goods. An airline can have an inventory of seats: a modern drugstore. an inventory of medicines, batteries. and toys: and an engineering firm. an inventory of engineering talent. By convention. manufacturing inventory generally refers to materials that contribute to or become part of a firm's product output. In services, inventory generally refers to the tangible goods that are sold and the supplies necessary to administer the service. Customers waiting in line at a service operation also can be viewed as inventory similar to plans waiting to be processed in a fac  ory.The basic purpose of inventory analysis in manufacturing and bookkeeping services is to specify (a) when items sho ld be ordered and (D) how large the order should be. Recent trends have modified the simple questions of "when" and "how many." As we saw in an earlier chapter on supply chain management, many firms are tending to enter into longer-term relationships with vendors to supply their needs for perhaps the entire year. This changes the "when" and "how many to order" to "when" and "how many to deliver.