Different inventory requirements
There are some important differences in the way inventory
requirements are determined that are related to the type of demand for the
products in question. The nature of this demand should have an influence on the
approach adopted to manage the inventory. One important way of differentiating
between demand types is that of dependent or independent demand. The type of
demand will have an influence on the nature of the inventory management
technique chosen. Independent demand occurs where the demand for one particular
product is not related to the demand for any other product.
Consumer demand for
a desktop computer is for example independent. Indeed most consumer products
are independent of the demand for other finished goods. This is an important
distinction because products with an independent demand necessitate the use of
forecasting to help determine expected demand levels and associated inventory
requirements. The EOQ approach is commonly used for products with independent demand.
Dependent demand occurs where the demand for a particular
products is directly related to another product. In the case of the desktop
computer for example the demand for the power leads or the connecting cables
would be directly dependent on the number of computers stocked as finished
goods. Dependent demand can be classified in two ways. It may be vertical eg
the chip actually required in the production of the computer or it may be
horizontal eg the instructional manual that is packed with the computer as a
finished product.
Typically most raw materials components and sub assemblies
have their demand dependent on the demand for the finished product. Because of
this dependence there is a far more limited requirement for the forecasting of
the demand for these elements as the actual needs are directly related to the
finished product requirements themselves. MRP and MRP|| systems are used for
these elements.
One feature that has become particularly relevant in recent
years concerns the nature of the demand requirement. It it a push system or a
pull system? A push system is the more traditional approach where inventory
replenishment is used to anticipate future demand requirements. A pull system
is where the actual demand for a product is used to pull the product through
the system. A push approach to inventory planning is usually based on a set
plan that is predetermined according to certain rules of inventory reordering.
This approach is a proactive one in the sense that it is planned on the basis
of estimated or forecast demand for products from customers.
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