Demand planning enables a company to determine how much of their goods and services customers will buy. By having this information, a company can determine how much they need to produce, and the materials required for that production. Companies can plan their production schedules, manage their resources, and determine the lead time needed to bring their goods to market.
Companies also work with their suppliers for help with demand planning. Collaborative planning, forecasting, and replenishment are all part of the process of sharing information and coordinating operations to ensure that an organization has the resources needed to meet demand. The growing trend is toward this increased level of shared information known as supply chain visibility. When a supplier has a greater understanding of what an organization's sales, operations and marketing efforts entail, they are in a better position to enable the company to meet customer needs.
Demand forecasting is part of a company's overall inventory control activities, with inventory control ensuring that the company has supply to meet customer demand. If a company does not have sufficient inventory, a stockout occurs, and customers will buy their goods from someone else. As part of demand forecasting, companies can ensure that they have safety stock, which is backup inventory in case demand changes.
To review, read Demand Planning and Inventory Control.
The ABC analysis helps an organization control inventory costs by using specific inventory policies to control the process. These factors, also known as "selective inventory control" identifies those items that impact overall industry costs, but are not of equal value. These include three categories that describe inventories that require tight controls and accurate records; those that are less tightly control, with good records; and those items with the simplest of controls and minimal records.
Inventory refers to both finished and unfinished goods that have not yet been sold. Finished good are those that are ready to be sold to customers. However, unfinished goods encompass the raw materials that will be used to make a product, as well as work-in-progress, which includes materials that are already being transformed into finished goods.
One method of projecting needed inventory levels is to tie that inventory directly into sales and production activities. Sales and inventory projections are evaluated against actual figures and input into MIS systems. This data is used to plan production schedules. All together, this information is used to plan future activities to ensure adequate inventory levels.
This approach also reflects how a perpetual inventory system operates. In this method, the sale or purchase of inventory is immediately recorded into computerized systems, allowing for an accurate reflection of the goods available at any point in time, and aids in production planning.
All inventory management systems must find a balance between availability of the product, customer needs, as well as the costs for meeting those needs. Material and goods must be continually monitored and may use ABC analysis, as previously discussed, as well as lot tracking and cycle counting support. These practices enable organizations to enjoy economies of scale and minimize costs associated with inventory levels.
The economic order quantity (EOQ) minimizes the total holding costs and ordering costs, and is one of the oldest models for production scheduling. Also known as the Wilson EOQ Model, Wilson Formula, or Andler Formula, this model is applied when demand for a particular product is constant over a year, and new orders are delivered in full when current inventory reaches a zero level. Costs for each order are fixed no matter how many items are ordered, and there is a cost associated with each unit held in storage. This is known as a holding cost, and may be calculated as a percentage of the purchase price of the item.
The variables that are used to determine total cost include: the purchase unit price/unit production cost (P); the quantity ordered (Q); the optimal order quantity (Q*); the annual demand quantity (D); and the fixed cost per order (K).
There are two types of quantity discounts under the EOQ model. These are all-units,where the optimal discount will occur at the breakpoint) and incremental, where the optimal discount will always occur at a specific EOQ value. The design of these discount schedules can be complex and is especially challenging when the customer is unsure of demand. Additionally, other extensions such as backordering and multiple items can enable a costs savings. For example, if a company is willing to accept backorders, costs will be lower since it reduces the holding costs. For multiple items, a discount can be realized when the same reorder interval is used for families of items with similar ordering and carrying costs.
To review, read Economic Order Quantity.
The reorder point is the level at which inventories need to be replenished to ensure that there is sufficient stock to meet demand. Different types of goods required different amounts of time to be ordered and received, so a formula for ensuring that stock-outs (not having sufficient inventory) is necessary.
The formula for calculating the reorder point is: ROP=d*LT. This means that the reorder point is a function of the demand rate (d---units per period/day/week) times the lead time (LT=lead time for the units in demand). For example, if a ski shop is expecting to sell 30 pairs of skis during a weak at peak ski season, and the lead time is 5 days, the reorder point is 150.
An inventory point-of-sale (POS) system can electronically record all items at the time of their sale and help companies more accurately forecast demand. By having this information, and knowing the required lead time for receiving merchandise, companies can be better equipped to meet customer demand.
To review, read Inventory Management.
This vocabulary list includes terms that might help you with the review items above and some terms you should be familiar with to be successful in completing the final exam for the course.
Try to think of the reason why each term is included.