Inventory management

Inventory management involves a retailer seeking to acquire and maintain a proper merchandise
assortment while ordering, shipping, handling, and related costs are kept in check. Systems and
processes that identify inventory requirements, set targets, provide replenishment techniques and
report actual and projected inventory status. Handles all functions related to the tracking and
management of material.

Inventory is categorized into two types of the demand, which involve Independent Demand and
Dependent Demand for inventories. Inventory management depend on the two types of demand
whether an items has a dependent or an independent character

Independent Demand

Independent demands are finished goods or other end items which exist where the rate of use for
an item does not relate directly to the use of another item (for example, finished goods such as
photocopy machine). An item can be categorized as independent demand when the demand for
such an item is not dependent upon the demand for another item.

Finished goods Items, which are ordered by External Customers or manufactured for stock and
sale, are called independent demand items. Independent demands for inventories are based on
confirmed Customer orders, forecasts, estimates and past historical data.

The demand for cutting oil used by the machines on the line cannot be calculated accurately from
the production schedule and bills of materials; thus, cutting oil is said to have an independent
demand.

Dependent Demand

These are items which are typically subassemblies or component used during the production of
finished or end product. If the demand for inventory of an item is dependent upon another item,
such demands are categorized as dependent demand. Raw materials and component inventories
are dependent upon the demand for Finished Goods and hence can be called as Dependent
demand inventories.

Dependent demand characterized when its use is directly dependent on the scheduled production
of a larger component or parent product of which the item is a part. Example, in a plant
producing automobile engines the demand for engine block casting is a dependent demand; once
the production schedule for a group of engines is established, the planner knows with certainty
that one block will be required for each engine. In some industries, dependent demand
sometimes called program items.
Take the example of a bicycle as finished goods is an held produced and held in inventory as
independent demand item, while the raw materials and components used in the manufacture of
the Finished Goods - bicycle derives its demand from the demand for the bicycle and is
characterized as dependent demand inventory.

The problems associated with managing independent and dependent demand supplies

In independent demand Delivery schedule determined by customer requirement that is order

forecasting which always based on assumption that may be wrong or affected by unforeseen
events such as war economic and social factors and weather. (By order or forecast) Product
demand, related to demand for other items as item is component of other product.

The main problem paused by the need to balance dependent demand supplies is balancing supply
and demand in complex multi-stage processes.

Since Independent demand is associated with fixed order and periodic review system: The
following are problems of periodic review system in independent demand:

• Larger stocks are required as reorder quantities must provide for the periodic between
reviews and lead time

• Reorder quantities are not based on economic ordering quantities

• When the rate of usage changes shortly after a review period a stock out may occur
before the next review period

• It is difficult to determine appropriate review period because demands are not consistent.

Fixed order quantity in independent demand.

• Overloading of system due to many items of inventory reach their reorder levels
simultaneously

• Items coming up for replenishment at different times hence causes random reordering
patterns

Approaches to solving independent demand problems

The EOQ is an inventory control technique that minimizes the total of ordering and
holding costs.Is one of the oldest and most commonly known inventory control
techniques.(Heizer J, 2008). It is based on the following assumptions;
 a. Demand is known, constant, and independent.

b. Lead time; that is the time between placement and receipt of the order is known and
constant.

c. Receipt of inventory is instantaneous and complete.

d. Quantity discounts are not possible.

e. Stockouts (shortages) can be completely avoided if orders are placed at the right time.

f. The only variable costs are the cost of setting up or placing an order (setup cost) and
the cost of holding or storing inventory over time (holding or carrying cost).

Dependent demand: Is associated with material requirement planning MRPI, Manufacturing

resource planning MRPII; enterprise resource planning ERP, Optimized production technology
whereby incurs the following problem in managing dependent demand supplies:

• Implementation of systems like ERP is difficult as it involves a fundamental change

from a functional to a process approach to business

• Systems like ERP are expensive

• Cost of training employees to use the systems

• ERP system focus on operational decisions and weak analytical capabilities

• Employee stress and resistance to change and sharing information that was closely
guarded by functions.

Approaches to dependent demand problems

MRP(Material Requirement Planning) is a tool to deal with dependent demand problems. It

provides answers for several questions:
MRP can be applied both to items that are purchased from outside suppliers and to sub-
assemblies, produced internally, that are components of more complex items. For any item for
which a schedule can be established, dependent techniques should be used.(Heizer, J, 2008).

Rushton A (2006) describes MRP as the principle of production scheduling based on the
premise that if one knows what product needs to be produced then one should also know how
many constituent parts are required in order to make the product.

Managing Raw Material Inventories (dependent demand) is far more complicated than managing
Finished Goods Inventory (independent demand). This involves analyzing and co-coordinating
delivery capacity, lead times and delivery schedules of all raw material suppliers, coupled with
the logistical processes and transit timelines involved in transportation and warehousing of raw
materials before they are ready to be supplied to the production shop floor. Raw material
management also involves periodic review of the inventory holding, inventory counting and
audits, followed by detailed analysis of the reports leading to financial and management
decisions.

Example:

In a McDonald&acircs, independent demand is the demand for various items offered for sale at
Big Macs, fries, etc. The demand for Egg McMuffins, for example, needs to be forecasted. Given
the forecast, then, the demand for the number of eggs, cheese, Canadian bacon, muffins, and
containers can then be computed based on the amount needed for each Egg McMuffin.

Example for the manufacturer of copiers is integrated, i.e., the parts, components, etc. are
produced internally. The demand for the number of copiers is independent (must be forecasted).
Given the forecast, the Bill of Materials is exploded to determine the amounts of raw materials,
components, parts, etc. that are needed.

The pharmaceutical supply company is an extreme case where only end items are carried and
nothing is produced internally. The bill of materials is the end item and, therefore, the
independent demand (forecasted from customers) is the same as the dependent demand. One
might attempt to consider that when the demand for items occurs together, that this is similar to a
bill of materials. This is not a bill of materials, but rather a causal relationship making it easier to
forecast.

Push and Pull systems as related to dependent and independent supplies

In order to build an effective marketing strategy for your business, it's important to understand
the theory behind what we call "push" and "pull" strategies, and how they can be utilized
together to drive optimal results in relation to independent and dependent demand supplies.

A hypothetical example to illustrate this concept of push and pull system in relation to
independent and dependent demand:

Suppose it's February and you've invented the world's greatest stadium noisemakers. Called "The
Loudinator", these things put Thunder sticks and Bam to shame. You've just invested a lot of
money into producing your line of specific Loudinators, and you've built an e-commerce website
that is ready to handle sales. Now you just need to incur some cost to generate awareness of your
product before the Opening Day.

Push strategy involves any marketing strategy that "pushes" its way in front of users without the
user initiating the request. Push marketing is great for generating brand awareness, promoting a
new product or service, or delivering a time-sensitive message. Independent demand supplies are
related to push system.

Examples of some push marketing tactics you could use to generate awareness of your new
product:

• Display advertising - Run display ads and video ads on relevant websites such as sports
blogs and sports news websites.

• Mobile ads - Targeted ads at users who are within a certain mile radius of baseball
stadiums, or who are searching for baseball-related phrase from their mobile phone.

• E-mail campaigns - Build an email list and distribute product information and promotions
such as spring-training discount offers.

• Sponsorships - Sponsor sporting events or sports news shows.

• Partnerships - Partner with bloggers and affiliates who will help push the product for you.

If all goes well, your push marketing will generate awareness of this glowing (or roaring) new
product and stimulate demand. Once people are aware of The Loudinator, they will most likely
begin searching for it and discussing it. This is when your pull strategy comes into play.

Pull strategy involves reeling in users who are actively looking for your content - The user has
initiated the request and you are simply reaching out to fulfill it for them.
Conclusion,

Therefore, it is important for the inventory manager to know whether an item exhibits a
dependent or an independent demand. Certain inventory control system function more effectively
with one type of item than with the other, therefore when these systems are controlled and
managed effectively the organization will be in a position to solve problems associated in
managing independent and dependent demand supplies.

REFERENCE

1. Chopra S and Meindl P, (2009); Supply Chain Management; 3rd Edition; New Delhi; PHI
Learning Private LTD.
2. Christopher M, (2005); Logistics and Supply Chain Management; 3rd edition Pearson
Education Limited.
3. Lysons K, and Gillingham M, (2003); Purchasing and Supply Chain Management;6th
edition; Pearson Education Limited.
4. Lysons K, and Farrington B, (2006); Purchasing and Supply Chain Management;7th
edition Pearson Education Limited..
5. Rushton A et al, (2006); a handbook of Logistics and distribution management; 3rd
edition; Kogan page Limited.
6. Heizer J and Render B, (2008), Principles of operations Management; 7th edition;
Pearson
Education Limited.
7. The Chartered Institute of Purchasing and supply
QUESTION:

Compare and contrast the problems posed by the need to manage dependent and independent
demand supplies, and explain in detail one appropriate approach for each of these two classes of
demand. Illustrate your answer by means of examples either from your experience or your
studies of the application of your chosen approaches.