Understanding which of the core inventory management models applies to
divisions of you business it a critical first step in using the right
techniques to manage your inventory. Inventory management models fall
into two fundamental categories: independent and dependent inventory
Independent demand inventory systems are at their very essence market driven. Whether the inventory is raw materials or a finished product, it is the end product of that particular organization. Pulls from inventory occur as an external customer purchases the units, either directly or as restock to a forward retail position.
Items with an independent demand tend to be managed through one of two processes: periodic review or perpetual inventory management.
Periodic Review: This process involves regular review of usage and reorder to a carrying point.
Perpetual Inventory: This process revolves around reorders when an item reaches a pre-set minimum stocking level, or reorder point.
While demand can be somewhat indirectly influenced via pricing, merchandising, marketing and a whole spectrum of marketing initiative, in the end the market determines the inventory turns. The challenges in predicting independent demand is that there may not be a history, or the history may not match due to the life cycle stage of the product.
Dependent demand inventory systems are classically associated with Enterprise Resource Planning systems. The known demand is generally based on production numbers and the inventory represents the raw materials required to meet those requirements.
This overall demand model allows the use of such inventory management models as Economic Ordering Quantity, Safety Stock Analysis, Fill Rates, and Cycle Service Levels.
In this demand model, supply chain concerns become more and more critical to inventory control decisions. Lead times, quantity price breaks, and the costs of expediting orders all play a role.
Knowing the type of demand you need to accommodate is the first step in developing your own customized inventory management models. Different segments of your inventory may actually service a different demand type.
Learning how to recognize the operating demand conditions is the first step to growing into a more efficient organization. The next step is implementing the processes that support the inventory management models.