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What Is Inventory Management? - Demand vs. Cost

What Is Inventory Management? - Demand vs. Cost
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  • 0:01 Definition
  • 0:38 Demand
  • 2:48 Cost
  • 3:59 Technology
  • 5:06 Lesson Summary
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

Inventory management is about making sure that there is enough product to meet the demand of the customers. But, what exactly is involved in inventory management? Watch this video lesson to find out.

Definition

Inventory management is the oversight of the ordering and storing of supplies that a business uses. For example, in a company that uses paint to make its custom painted plates, inventory management is responsible for the ordering of the blank plates and the paint. Inventory management is also responsible for storing the supplies and finished products. This sounds simple enough, but inventory management isn't just about ordering the supplies and then placing them in a warehouse. Inventory management also needs to organize and keep track of all the supplies so it is known when an order needs to be placed for more.

Demand

Now, does this mean that inventory management can place an order for an arbitrary amount of supplies? No. The amount of each supply that inventory management needs to order depends on the demand for the products that the business makes. Let's look at how Bob goes about doing his job as inventory manager of the fictional business Plates 4 You that paints custom plates for its customers.

Before Bob places his orders for supplies, he looks at the demand for each supply. His supplies fall into one of two demand categories. The two demand categories are dependent demand and independent demand. A supply falls into the independent demand category when the amount needed does not depend on another supply. A supply falls into the dependent demand category when the amount needed depends on another supply.

For example, the plates are an independent demand item because it doesn't depend on another item, but the plate holder for the plates is a dependent demand item because the holders depend on the plates. If the company sells 500 plates, then the company also needs to include 500 holders. The number of holders depends on the number of plates sold, but the number of plates sold doesn't depend on anything else.

As the inventory manager, Bob takes into consideration his dependent demand items and his independent demand items. Bob has already performed a forecast for future demand for the plates. He sees that for the next week, the company expects to sell 300 custom plates. This tells Bob that he needs to purchase 300 plates to meet the demand for the week. Now, because Bob needs to buy 300 plates, he also needs to purchase the dependent demand items related to the plates. So, Bob also needs to purchase 300 holders for the plates. If there are other dependent items, then Bob also needs to purchase those. Of course, if a business has more items, then more independent demand items need to be purchased along with the dependent demand items for each of the independent demand items.

Once Bob has purchased his items, he then needs to store them and organize them. Bob also has a system in place to keep track of how his items are used. Once his items reach a certain minimum level, Bob then goes ahead and makes another purchase.

Cost

Ideally, inventory management will be able to purchase everything the company needs. But most companies have a spending budget that inventory management must stick to. So, the cost of the supplies is something that inventory management also needs to consider, along with finding the necessary supplies for a reasonable price so the budget is not exceeded.

For example, Bob has a weekly inventory budget of $300. Bob needs to make sure that the cost of all his needed supplies doesn't exceed his weekly budget. As Bob is looking through the plates and holders he needs to purchase, he sees that the cost of the 300 plates plus holders brings his total to $350. That's $50 over his budget. Bob has a dilemma.

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