ABSTRACT
This chapter explains the reasons why managing inventory is necessary. It presents the difference between a make-to-stock and make-to-order finished goods strategy; and it calculates the safety stock and the right level of inventory. The chapter uses a pull system to replenish finished goods. It discusses how to measure stock-outs and inventory accuracy; and how to manage in make-to-order supply to ensure on-time delivery. In many businesses, the occurrence of a stock shortage will cause a "knee-jerk" reflexive response—"increase the safety stock!" Sometimes, these reactive stock increases stay in place for years after the incident that triggered them. In reality, an inventory shortage can be caused by any number of things, including a one-off spike in customer demand, an unexpected interruption in supply, a quality issue, or a poorly planned promotion. Pull systems give better outcomes for replenishment of stock in terms of inventory levels and frequency of shortages because they do not rely on inaccurate forecasts.
