13.1: Introduction

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An inventory is a collection of parts or finished products that are waiting for use or shipment. Inventories increase costs by requiring storage space that could otherwise be productively used or simply not constructed. The cost of producing or purchasing what is stored cannot be recovered until the final product is delivered. Thus, minimizing inventories is important. On the other hand, not having a part or finished product when needed may lead to a stoppage of production or a dissatisfied customer who takes business elsewhere, thus decreasing revenue. Thus, having enough inventory is essential.

Lean demand management requires that manufacturers work with suppliers so that raw material or purchased parts are delivered precisely when needed. Manufacturers co-operate with large volume retailers to manage their inventories and ship product when sales records indicate that current inventory levels are low. Information gathered from scanning product bar codes at customer checkout can be aggregated and transferred electronically to the manufacturer nightly to enable this procedure.

This case study deals with an automated inventory system for a single product. The retail seller electronically collects information at the point of sale and transmits total daily sales to the supplier. The supplier must organize production and delivery to the seller such that the seller's inventory is not excessive and sales are not lost due to a lack of inventory.