Operations Management: An Integrated Approach, 5th Edition

HOW COMPANIES USE THEIR INVENTORY

Companies have different kinds of inventory. They also use inventory for different purposes. Let's look at six ways of using inventory.

1. Anticipation Inventory or Seasonal Inventory is built in anticipation of future demand, planned promotional programs, seasonal fluctuations, plant shutdowns, and vacations. Companies build anticipation inventory to maintain level production throughout the year. For example, the toy industry builds toys throughout the year in anticipation of high seasonal sales in December.

Anticipation inventory

Inventory built in anticipation of future demand.

2. Fluctuation Inventory or Safety Stock is carried as a cushion to protect against possible demand variation, “just in case” of unexpected demand. For example, you might keep extra food in the freezer just in case unexpected company drops in. Fluctuation inventory or safety stock is also called buffer stock or reserve stock.

Fluctuation inventory

Provides a cushion against unexpected demand.

3. Lot-size Inventory or Cycle Stock results when a company buys or produces more than is immediately needed. The extra units of lot-size inventory are carried in inventory and depleted as customers place orders. Consider what happens when you buy a 24-can case of soda. You do not ...