ABSTRACT
Inventory and production-planning decisions nearly always involve the allocation of resources in the presence of demand uncertainty. For inventory decisions, financial resources must be deployed to procure goods in the anticipation of a future sale of those goods. Similarly, for production planning, capacity must be committed to certain products in anticipation of their future sale. Effective decision making in inventory management and production planning requires accurate descriptions of possible demands in future periods. As noted earlier in Chapter 1, variability can be a key driver of inventory expense. A study at a large high-tech firm revealed that 40% of the inventories in their system were cycle and pipeline stocks, whereas 60% were due to variability. Of the inventories driven by variability, 2% were held due to supplier performance variability, 2% were held due to manufacturing variability, and 96% were held due to demand uncertainty. A similar study at a large chemical producer revealed that 45% of finished goods inventory were held due to variability, again with the majority of that inventory held due to demand variability. These two examples highlight that while the relative impact of demand uncertainty on the inventory will vary across industrial settings, demand uncertainty will almost always be a significant factor for inventory management.
