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Understanding Independent and Dependent Demand in Inventory Management

This chapter explores inventory management concepts, focusing on independent and dependent demand. Independent demand is uncertain, while dependent demand is predictable, based on the production requirements for finished goods. The chapter outlines inventory types—including raw materials, work in progress, and finished goods—and their functions such as meeting demand and preventing stock-outs. It also introduces the Economic Order Quantity (EOQ) formula, provides practical examples, and discusses the assumptions underlying the basic EOQ model, essential for effective inventory control.

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Understanding Independent and Dependent Demand in Inventory Management

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  1. CHAPTER 8 Inventory Management

  2. Independent Demand Dependent Demand A C(2) B(4) H(2) E(1) F(2) D(3) Independent demand is uncertain. Dependent demand is certain. Inventory: a stock or store of goods

  3. A C(2) B(4) H(2) E(1) D(3) F(2) How many items of C, D, and E should be requested if Quantity of A = 100 units Answer Q of C = 100 x 2 = 200 units Q of D = 100 x 2 x 3 = 600 units Q of E = 100x 4 x 1 = 400 units

  4. Types of Inventories • Raw materials • Partially completed goods called work in progress • Finished-goods inventories • Replacement supplies such as spare parts • Goods-in-transit to warehouses or customers

  5. Functions of Inventory • To meet demand • To smooth production • To protect against stock-outs • To help hedge against price increases • To take advantage of quantity discounts

  6. Economic Order Quantity

  7. EOQ = = 400 units 2(16000)(2000) 400 EOQ = 2DS H EOQ Example 1 When Order cost = $ 2000 per order Semi-annual quantity = 8000 units Holding cost = $ 400 per unit Find EOQ

  8. EOQ Example 2 Based on the previous problem Find • No. of orders No. of orders = D/EOQ = 16000/400 = 40 orders b) Order cost Order cost = No. of Orders x Order Cost = 40 x $ 2000 = $ 80000 c) Holding cost Holding cost = EOQ/2 x Holding cost 400/2 x $ 400 = $ 80000 d)Total cost Total cost = Order cost + Holding cost = $ 80000 + $ 80000 = $160000

  9. Assumptions of Basic EOQ Model • Demand is known with certainty and is constant over time • No shortages are allowed • Lead time for the receipt of orders is constant • Order quantity is received all at once

  10. Inventory Order Cycle Order quantity, Q Average inventory Demand rate Inventory Level Q 2 Reorder point, R 0 Time Lead time Lead time Order placed Order receipt Order placed Order receipt

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