Chapter 8
Quantity and Inventory
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Key Questions
Addressed in Chapter 8
• How much to acquire?
• When to acquire?
• How to inventory effectively?
Factors Complicating Quantity
Decisions
• Forecasts
– Purchase decisions made a long time before actual
requirements are known
– Rely on forecasts of future demand, lead times, prices,
and other costs
– Forecasts are rarely, if ever, perfect
• Costs
– Costs associated with placing orders, holding inventory,
running out of materials, and having a service
unavailable when needed
Factors Complicating Quantity
Decisions
• Availability
– Desired quantities may be unavailable without paying a
higher price or delivery charge
• Price-Volume Relationship
– Reduced prices for larger quantities versus carrying
costs
• Shortages
– May cause serious disruptions
Forecasting Techniques:
• Quantitative:
– Use past data to predict the future
• Causal models
• Time series forecasting
• Qualitative:
– Gather opinions and use with judgment to
forecast
• Market forecasts: estimates of sales staff
• Top down forecast
• The Delphi technique: a formal approach
Types of Demand
• Dependent or derived demand:
– item is part of a larger component or product, and
its use is dependent on the production schedule
for the larger component
– example: demand for bottles and caps for a drink
• Independent demand:
– usage is determined directly by customer orders,
independent of production scheduling decisions
– example: demand for an energy drink
Why Inventory?
• To provide and maintain good customer service.
• To smooth the flow of goods through the
production process
• To provide protection against the uncertainties
of supply and demand
• To obtain a reasonable utilization of people and
equipment
Cost of Inventories
• Basic elements are:
– capital costs
– inventory service costs
– storage space costs
– inventory risk costs
ABC Classification of Purchases
Percentage of Total Percentage of Total
Class
Items Purchased Purchase Dollars
A 10 70-80
B 10-20 10-15
C 70-80 10-20
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Determining Quantity
of Services
• Forecasting aggregate demand for services often
more unreliable than for goods
– Multiple contacts: users, specifiers, order placers, and
supplier relationship managers
– Multiple contracts at varying prices and terms with the
same supplier
• Organizationwide consumption management is
impossible under these conditions
• Difficult for suppliers to determine capacity
requirements and project utilization rates