Elements of Inventory Systems

Elements of Inventory Systems

In this lesson, you’re expected to:
– understand how demand and supply processes influence inventory management
– learn about the factors affecting inventory decisions

Inventory between Supply & Demand Processes

At a high-level of abstraction, inventory is the central component of the system that mediates the supply and demand processes.

• We begin with a general, abstract way of looking at an inventory. We focus first on the inventory of only one item, at a single location.

 Every inventory lies between two activities: the supply processand the demand process.

Source: Zipkin (2000)
• Supply process comprises the production, transportation and/or other activities that add new stock to the inventory.

• Demand process describes the various activities that reduce material from the inventory.

Common characteristics of supply and demand processes that lead to supply-demand mismatches

• Supply and demand processes might be quite simple or enormously complex systems themselves.

• However, even though it does not represent 100% of the reality – as is the case with any model – it is useful in building our understanding and expanding it to more complex models.

• As we saw earlier, inventory serves as a buffer to reconcile mismatches between supply and demand.

Here is a short list (non-exhaustive) of common characteristics of the demand and supply processes that lead to such mismatches:
Demand Process characterizes the way in which orders are placed by customers:

• It can be smooth or include unexpected lump sums.
• It can vary over time.
• It can exhibit different degrees of unpredictability.

Supply Process characterizes the way in which suppliers provide materials:

• It can present different degrees of economies of scale.
• Suppliers’ capacity can vary (i.e. unlimited, limited/constrained).
• Whether there are delays in response, in order for products to be available (lead times).
• It can present different quality standards (i.e. defective products).

[Optional] The Delicate Balance Between Supply, Demand, and Inventory Control
Characteristics of demand processes that influence inventory-related decisions
* Non-exhaustive

Enlarged version: http://bit.ly/2oCODiH

Characteristics of supply processes that influence inventory-related decisions
* Non-exhaustive

Enlarged version: http://bit.ly/2psbH7N

Other factors, not related to supply or demand processes, that influence inventory decisions

What Happens to Excess Demand
– All orders are backordered
– Orders are lost
– Orders are substituted by another product
– There is no excess demand (deterministic demand)

Number of Items
– One
– Many

– Goods are perishable
– Goods are not perishable

Planning Horizon
– Single period (one day, month, year…)
– Finite period (planning has a known finish time)
– Infinite

Review Time
– Continuous review (inventory is continuously controlled)
– Periodic review (inventory is controlled in predetermined periods, such as once a week)

[Optional] Behind the scenes of an Amazon warehouse
Watch this 5-minute video to see how Amazon handles inventory:
Jim Rohn Sứ mệnh khởi nghiệp