Fundamentals of Business

Inventory

Inventory is a list of goods and materials, or those goods and materials themselves, held available in stock by a business. Inventory in supply chain has only to do with service levels.

Special terms used in dealing with inventory

Stock Keeping Unit ( SKU SKU)
is a unique combination of all the components that are assembled into the purchasable item. Therefore any change in the packaging or product is a new SKU. This level of detailed specification assists in managing inventory.

Stock out means running out of the inventory of an SKU.
New old stock (sometimes abbreviated NOS) is a term used in business to refer to merchandise being offered for sale which was manufactured long ago but that has never been used. Such merchandise may not be produced any more, and the new old stock may represent the only market source of a particular item at the present time.

Independent demand
Inventory control classification for items the demand for which has no relationship with the demand for any other item.

Example finished goods and spare parts, low cost mass consumption items like bolts, nuts, and e.t.c.

Dependent demand
Demand for item (called lower level or child item) that does not occur until there is a demand for another item (called higher level or parent item). Also, where demand for the higher level or parent item can be satisfied only if the lower level or child items are available. Examples raw materials, components, subassemblies.

Independent Demand Inventory Systems
√ Due to the nature of demand, an important distinction is made between independent and dependent demand.
√ Independent demand inventory control procedures rely upon unbiased forecasts of uncertain demand. Demand and lead times may be treated as random variables. Forecasts are used to develop production and purchase schedules for end items.
√ Dependent demand inventory control techniques utilize material requirements planning (MRP) logic. MRP converts production and purchase schedules for independently demanded end items into known requirements for lower level items in order to determine production and purchase schedules.

Regardless of the nature of demand (independent, dependent, seasonal, terminal, lumpy, etc.)
Two fundamental issues underlie all inventory planning:
1. How much to order (Q)
2. When to order