in what ways to independent-demand inventories differ from dependent-demand inventories?

9.2 Demand Planning and Inventory Control

Learning Objectives

1. Explicate why need planning adds value to products.
2. Describe the function inventory control plays when it comes marketing products.
3. List the reasons why firms collaborate with some other for the purposes of inventory control and demand planning.

Demand Planning

Imagine you are a marketing manager who has done everything in your ability to help develop and promote a production—and information technology's selling well. Simply now your company is running brusk of the product considering the demand forecasts for it were too low. Recall that this is the scenario Nintendo faced when the Wii kickoff came out. The same thing happened to IBM when information technology launched the popular ThinkPad laptop in 1992.

Not only is the production shortage going to adversely affect the profitably of your visitor, but it's going to adversely bear on you, too. Why? Because y'all, equally a marketing manager, probably earn either a bonus or commission from the products you work to promote, depending on how well they sell. And, of course, yous tin can't sell what yous don't have.

Figure 9.6

IBM ThinkPads were hard to find in 1992. But NASA didn't accept whatever trouble getting one. In 1993, astronauts used it to repair the Hubble Space Telescope, which orbits Earth.

As y'all can probably tell, the best marketing decisions and supplier selections aren't enough if your company'south need forecasts are wrong. Need planning is the procedure of estimating how much of a good or service customers will buy from you. If y'all're a producer of a product, this will affect not only the amount of goods and services y'all have to produce only besides the materials you must purchase to make them. Information technology will also touch your production scheduling, or the direction of the resources, events, and processes need to create an offering. For example, if need is heavy, you might need your staff members to work overtime. Closely related to demand forecasting are pb times. A product's lead fourth dimension is the amount of time it takes for a customer to receive a good or service once it'southward been ordered. Pb times likewise have to be taken into account when a visitor is forecasting demand.

Sourcing decisions—deciding which suppliers to employ—are more often than not fabricated periodically. Forecasting decisions must exist made more oft—sometimes daily. Ane way for you to predict the need for your production is to look at your company'south past sales. This is what most companies do. Merely they don't finish there. Why? Because changes in many factors—the availability of materials to produce a product and their prices, global contest, oil prices (which touch on aircraft costs), the economy, and even the conditions—can change the picture.

For case, when the economy hitting the skids in 2008, the need for many products roughshod. So if you had based your product, sales, and marketing forecasts on 2007 data alone, chances are your forecasts would have been wildly wrong. Do you remember when peanut butter was recalled in 2009 because of contamination? If your firm were part of the supply chain for peanut butter products, you would take needed to speedily modify your forecasts.

The promotions you run will also affect demand for your products. Consider what happened to KFC when it first came out with its new grilled craven product. As part of the promotion, KFC gave away coupons for free grilled craven via Oprah.com. Just xx-four hours subsequently the coupons were uploaded to the Spider web site, KFC risked running out of chicken. Many customers were turned away. Others were given "rain checks" (certificates) they could use to get gratuitous grilled chicken afterwards (Weisenthal, 2009).

Effigy 9.7

KFC's new Kentucky Grilled Chicken was finger-lickin' good—if you could get it. Reportedly, the chain near ran out of the birds following a promotion on Oprah.com.

In addition to looking at the sales histories of their firms, supply chain managers besides consult with marketing managers and sales executives when they are generating demand forecasts. Sales and marketing personnel know what promotions are being planned because they work more closely with customers and know what customers' needs are and if those needs are changing.

Firms as well look to their supply chain partners to help with their demand planning. Collaborative planning, forecasting, and replenishment (CPFR) is a exercise whereby supply chain partners share information and coordinate their operations. Walmart has developed a Web-based CPFR system called Retail Link. Retailers can log into Retail Link to run across how well their products are selling at various Walmart stores, how soon more products demand to be shipped to the company and where, how any promotions existence run are affecting the profitability of their products, and so forth. Considering different companies often use different information technology systems and software, Web-based tools like Retail Link are becoming a popular way for supply concatenation partners to interface with one another.

Non all firms are wild nearly sharing every piece of data they tin can with their supply bondage partners. Some retailers view their sales data as an asset—something they can sell to information companies similar Information Resources, Inc., which provides competitive information to firms that willing to pay for it (Bowersox & Closs, 2000). By contrast, other firms become so far equally to involve their suppliers before even producing a product so they can suggest design changes, material choices, and production recommendations.

Video Clip

Take a Examination Drive of the Tata Nano

(click to see video)

Priced at nearly $two,500 the Tata Nano is the to the lowest degree expensive motorcar ever produced in the world. To make a condom, reliable motorcar at such a low cost, Tata Motors, an Indian company, sought new, innovative pattern approaches from its suppliers. The elimination of 1 of the automobile'southward 2 windshield wipers was one result of the collaboration that occurred between Tata and its supply chain partners (Wingett, 2008).

The tendency is clearly toward more shared information, or what businesspeople refer to as supply concatenation visibility. After all, it makes sense that a supplier will exist not only more than reliable just besides in a ameliorate position to add together value to your products if it knows what your sales, operations, and marketing plans are—and what your customers desire. By sharing more than just bones transaction information, companies can meet how well operations are proceeding, how products are flowing through the chain, how well the partners are performing and cooperating with i another, and the extent to which value is beingness built in to the product.

Demand-planning software can besides be used to create more accurate demand forecasts. Demand-planning software can synthesize a variety of factors to better predict a house's demand—for instance, the business firm'southward sales history, bespeak-of-sale data, warehouse, suppliers, and promotion information, and economical and competitive trends. And then a company's demand forecasts are every bit up-to-date as possible, some of the systems allow sales and marketing personnel to input purchasing information into their mobile devices afterward consulting with customers.

Litehouse Foods, a salad dressing manufacturer, was able to meliorate its forecasts dramatically by using demand-planning software. Originally the visitor was using a traditional sales database and spreadsheets to exercise the piece of work. "It was all pretty much manual calculations. We had no engine to do the heavy lifting for us," says John Shaw, the company's Data Technology manager. In a brusque fourth dimension, the company was able to reduce its inventory by near one-third while still coming together its customers' needs (Casper, 2008).

Inventory Control

Demand forecasting is function of a visitor's overall inventory control activities. Inventory control is the process of ensuring your firm has an adequate supply of products and a wide enough assortment of them encounter your customers' needs. One of the goals of inventory management is to avert stockouts. A stockout occurs when you run out of a product a customer wants to buy. Customers will simply await elsewhere to buy the production—a process the Internet has made easier than ever.

When the attack on the Globe Merchandise Center occurred, many Americans rushed to the store to buy batteries, flashlights, American flags, canned goods, and other products in the event that the emergency signaled a much bigger attack. Target sold out of many items and could not furnish them for several days, partly considering its inventory tracking system simply counted up what was needed at the stop of the day. Walmart, on the other hand, took count of what was needed every v minutes. Before the end of the day, Walmart had purchased enough American flags, for example, to meet demand and in and so doing, completely locked upwardly all their vendors' flags. Meanwhile, Target was out of flags and out of luck—at that place were no more to be had.

To help avoid stockouts, most companies keep a sure corporeality of safety stock on hand. Prophylactic stock is backup inventory that serves as a buffer in case the demand for a product surges or the supply of it drops off for some reason. Maintaining too much inventory, though, ties up money that could be spent other ways—maybe on marketing promotions. Inventory too has to exist insured, and in some cases, taxes must exist paid on information technology. Products in inventory tin as well become obsolete, deteriorate, spoil, or "shrink." Shrinkage is a term used to depict a reduction or loss in inventory due to shoplifting, employee theft, paperwork errors, or supplier fraud (Waters, 2009).

When the economy went into its most recent slide, many firms found themselves between a rock and a hard place in terms of their inventory levels. On the one hand, because sales were low, firms were reluctant to agree much safety stock. Many companies, including Walmart, cut the number of brands they sold in addition to property a smaller corporeality of inventory. On the other hand, because they didn't know when business would pick upwardly, they ran the risk of running out of products. Many firms dealt with the problem by maintaining larger amounts of key products. Companies as well watched their supply chain partners struggle to survive. Forty-five percent of firms responding to i survey about the downturn reported providing financial help to their critical supply chain partners—oft in the course of credit and revised payment schedulesⁱ.

Just-in-Time Inventory Systems

To lower the corporeality of inventory and still maintain they stock they need to satisfy their customers, some organizations apply merely-in-fourth dimension inventory systems in both adept times and bad. Firms with just-in-time inventory systems keep very lilliputian inventory on paw. Instead, they contract with their suppliers to ship them inventory as they demand it—and even sometimes manage their inventory for them—a practice called vendor-managed inventory (VMI). Dell is an example of a company that utilizes a just-in-time inventory system that's vendor managed. Dell carries very few component parts. Instead, its suppliers carry them. They are located in pocket-size warehouses near Dell's assembly plants worldwide and provide Dell with parts "just-in-time" for them to exist assembled (Kumar & Craig, 2007).

Dell's inventory and production system allows customers to become their computers built exactly to their specifications, a product process that'due south chosen mass customization. This helps keep Dell's inventory levels depression. Instead of a huge inventory of expensive, already-assembled computers consumers may or may not buy, Dell simply has the parts on manus, which can exist configured or reconfigured should consumers' preferences change. Dell tin more hands return the parts to its suppliers if at some point it redesigns its computers to better friction match what its customers want. And by keeping rails of its customers and what they are ordering, Dell has a amend idea of what they might lodge in the future and the types of inventory it should concord. Because mass customization lets buyers "accept it their way," it also adds value to products, for which many customers are willing to pay.

Product Tracking

Some companies, including Walmart, are beginning to experiment with new technologies such as electronic production codes in an effort to better manage their inventories. An electronic product code (EPC) is like to a barcode, only meliorate, because the number on it is truly unique. You have probably watched a checkout person scan a barcode off of a production identical to the one you wanted to purchase—perhaps a pack of mucilage—considering the barcode on your production was missing or wouldn't scan. Electronic product codes get in possible to distinguish betwixt two identical packs of gum. The codes comprise data nearly when the packs of glue were manufactured, where they were shipped from, and where they were going to. Being able to tell the deviation between "seemingly" identical products can assist companies monitor their expiration dates if they are recalled for quality of safe reasons. EPC technology can also be used to combat "faux" products, or knockoffs, in the marketplace.

Video Prune

The Basics of RFID and EPC Technology

(click to meet video)

To understand how EPC and RFID technology tin help marketers, spotter this YouTube video.

Electronic production codes are stored on radio-frequency identification (RFID) tags. A radio-frequency identification (RFID) tag emits radio signals that can tape and track a shipment as information technology comes in and out of a facility. If you have unlocked your automobile door remotely, microchipped your dog, or waved a tollway tag at a checkpoint, you have used RFID technology². Considering each RFID tag can cost anywhere from $0.50 to $50 each, they are more often than not used to track larger shipments, such cases and pallets of goods rather than individual items. See Effigy nine.8 "How RFID Tagging Works" to get an thought of how RFID tags work.

Figure 9.eight How RFID Tagging Works

Some consumer groups worry that RFID tags and electronic production codes could be used to runway their consumption patterns or for the wrong purposes. Just keep in mind that like your machine-door remote, the codes and tags are designed to work only inside brusque ranges. (You know that if you try to unlock your car from a mile away using such a device, it won't work.)

Proponents of electronic product codes and RFID tags believe they can salvage both consumers and companies fourth dimension and money. These people believe consumers benefit considering the data embedded in the codes and tags aid foreclose stockouts and out-of-date products from remaining on store shelves. In addition, the engineering science doesn't require cashiers to scan barcodes detail by item. Instead an electronic product reader can automatically tally up the entire contents of a shopping cart—much like a wireless network tin detect your computer within seconds. As a customer, wouldn't that add value to your shopping feel?

Key Takeaway

The best marketing decisions and supplier selections aren't enough if your company'due south demand forecasts are wrong. Need forecasting is the process of estimating how much of a adept or service a client volition buy from you. If you're a producer of a production, this will affect non but the amount of appurtenances and services you accept to produce only as well the materials you lot must purchase to make them. Need forecasting is part of a company's overall inventory control activities. Inventory control is the process of ensuring your business firm has an acceptable amount of products and a wide enough array of them meet your customers' needs. 1 of the goals of inventory control is to avert stockouts without keeping too much of a production on manus. Some companies are beginning to experiment with new technologies such equally electronic production codes and RFID tags in an endeavour to better manage their inventories and run across their customers' needs.

Review Questions

1. Why are need forecasts made more than frequently than sourcing decisions?
2. How can simply-in-time and vendor-managed inventories add value to products for customers?
3. Why and how do companies rail products?

ⁱPRTM Management Consultants, "Global Supply Chain Trends 2008–2010," http://www.prtm.com/uploadedFiles/Strategic_Viewpoint/Articles/Article_Content/Global_Supply_Chain_Trends_Report_%202008.pdf (accessed Dec ii, 2009).

²"FAQs," EPCglobal, http://world wide web.epcglobalinc.org/consumer_info/faq (accessed December 2, 2009).

References

Bowersox D. J. and David J. Closs, "Ten Mega-Trends That Volition Revolutionize Supply Chain Logistics," Journal of Business Logistics 21, no. 2 (2000): 11.

Casper, C., "Need Planning Comes of Age," Food Logistics 101 (January/February 2008): xix–24.

Kumar S. and Sarah Craig, "Dell, Inc.'southward Closed Loop Supply Chain for Computer Assembly Plants," Data Cognition Systems Management 6, no. 3 (2007): 197–214.

Waters, Southward., "Shrinkage," About.com, http://retail.about.com/od/glossary/g/shrinkage.htm (accessed December ii, 2009).

Weisenthal, J., "Slammed KFC 'Scrambling to Source More Craven,'" The Business Insider, May 6, 2009, http://www.businessinsider.com/kfc-2009-5 (accessed December 2, 2009).

Wingett, S., "Capro, Saint-Gobain, Denso Win Big with Tata Nano," Automotive News Europe, March iii, 2008, xvi.

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Source: https://open.lib.umn.edu/principlesmarketing/chapter/9-2-demand-planning-and-inventory-control/

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