How to Best Understand Supply Chain Inventory

Executive Summary

  • Considering inventory it is necessary to understand why it is held.
  • We cover the components that makeup inventory that is held.


In supply planning, inventory is that product that his held in the company’s supply network to satisfy demand. In this article you will learn the various reasons for holding supply chain inventory. 

Inventory and the Manufacturing Environment

Finished goods inventory is necessary for make to stock environments. Component inventory is necessary in assemble to order environments. In make to order environments, if followed faithfully, no inventory should be necessary. Fundamentally inventory is necessary due to the lag between when a product is demanded, and when it can be supplied.

Sales and Statistical Forecasting Combined: Mixing Approaches for Improved Forecast Accuracy

Like the question of what is inventory, the reasons for holding inventory or stock inventory boil down to the fact the lead-times for production and procurement are longer than the customer demand lead-time.

Not all companies need to forecast all of their finished goods products. One example of this is defense contractors that frequently know years in advance, what they will build as they have firm contracts containing quantities and dates from the government.

However, even these companies are still required to create forecasts for the service parts that support the products that they sell.

How is Inventory Positioned? 

Inventory is positioned in different locations by the supply planning system. The assumptions that the software uses to perform positioning very much depends upon the supply planning method selected.

This is described in this article.

What Makes Up Inventory?

The total inventory at a location is the total stocking level, which is made up of cycle stock (the stock held between ordering) and safety stock (the stock designed to ensure there is enough stock to satisfy demand while mitigating demand and supply variability)

  • The total stocking level is not necessarily the correct amount of stock that should be held.
  • This is referred to as the target stocking level (only MEIO vendors refer to it like this, but it is quite a logical term)

What are the Functions of Inventory to Keep Inventory, or the Reasons for Holding Inventory and to Stock Inventory?

Fundamentally the functions of inventory are to allow the company or entity to have something available at the time of sale. The reason for holding inventory or to stock inventory is because, in the vast majority of cases, the lead time required by the customer, or the order period is shorter than the

The reason to keep inventory or to stock inventory is because, in the vast majority of cases, the lead time required by the customer, or the order period is shorter than the replenishment lead time. This is the reason to keep inventory or stock inventory because not to do so will result in not being able to fulfill demand.

Understanding how the various lead time connects is required to get to the essence of the functions of inventory.

The True Reasons for Holding Inventory

This is important to consider the true reasons for holding inventory. This is because many Lean inventory advocates propose that stock can be drastically cut and in fact refer to inventory as a liability.

That is technically inaccurate. When inventory is excessive that portion of the stock is a liability, but it is only really a liability if the inventory is either not used or if it is significantly marked down when sold.

The costs of carrying inventory for short periods of time is quite low. And of course, the cost of having a stock out is much higher than having too much inventory. Therefore the reasons for holding inventory really required illumination.


Inventory is controlled by the supply planning system and is designed to be moved and stocked to satisfy future demand. The reasons for holding inventory are often not fully explained and the costs of maintaining inventory versus not having inventory when it is needed, are in most situations not quantified.

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Brightwork MRP & S&OP Explorer for Order Optimization

Order Sizing and Optimization

Order optimization is necessary in order to get the predicted value from ERP and other supply planning applications. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:


Replenishment Triggers Book

Replenishment Triggers

Getting the Terminology Right

The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.

The Universality of The Manufacturing Environment Type

These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.

Getting Clear on Requirements Strategies

Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.

This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).

By reading this book you will learn:

  • What are the major manufacturing environments and what determines which manufacturing environment a company follows?
  • How do the different manufacturing environments impact how inventory is carried?
  • How are the various production environments configured in software?
  • What is mass customization, and how accurate is useful is this concept in real life?
  • What is the interaction between variant configuration and the manufacturing environment and the bill of materials?


Chapter 1: Introduction
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion

Software Ratings: Supply Planning

Software Ratings

Brightwork Research & Analysis offers the following free supply planning software analysis and ratings. See by clicking the image below: