Editing Inventory (section)

==Principle of inventory proportionality==

===Purpose===
Inventory proportionality is the goal of demand-driven inventory management. The primary optimal outcome is to have the same number of days' (or hours', etc.) worth of inventory on hand across all products so that the time of runout of all products would be simultaneous. In such a case, there is no "excess inventory", that is, inventory that would be left over of another product when the first product runs out. Holding excess inventory is sub-optimal because the money spent to obtain and the cost of holding it could have been utilized better elsewhere, i.e. to the product that just ran out.

The secondary goal of inventory proportionality is inventory minimization. By integrating accurate [[demand forecasting]] with inventory management, rather than only looking at past averages, a much more accurate and optimal outcome is expected. Integrating demand forecasting into inventory management in this way also allows for the prediction of the "can fit" point when inventory storage is limited on a per-product basis.

===Applications===
The technique of inventory proportionality is most appropriate for inventories that remain unseen by the consumer, as opposed to "keep full" systems where a retail consumer would like to see full shelves of the product they are buying so as not to think they are buying something old, unwanted or stale; and differentiated from the "trigger point" systems where product is reordered when it hits a certain level; inventory proportionality is used effectively by just-in-time manufacturing processes and retail applications where the product is hidden from view.

One early example of inventory proportionality used in a retail application in the United States was for motor fuel. Motor fuel (e.g. gasoline) is generally stored in underground storage tanks. The motorists do not know whether they are buying gasoline off the top or bottom of the tank, nor need they care. Additionally, these storage tanks have a maximum capacity and cannot be overfilled. Finally, the product is expensive. Inventory proportionality is used to balance the inventories of the different grades of motor fuel, each stored in dedicated tanks, in proportion to the sales of each grade. Excess inventory is not seen or valued by the consumer, so it is simply cash sunk (literally) into the ground. Inventory proportionality minimizes the amount of excess inventory carried in underground storage tanks. This application for motor fuel was first developed and implemented by [[Petrolsoft Corporation]] in 1990 for [[Chevron Corporation|Chevron]] Products Company. Most major oil companies use such systems today.<ref name=aspentech>{{citation|url=http://www.aspentech.com/solutions/industry_solutions/refining_marketing/aspenone_supply_distribution.cfm|title=aspenONE Supply & Distribution for Refining & Marketing|url-status=dead|archive-url=https://web.archive.org/web/20100608125910/http://www.aspentech.com/solutions/industry_solutions/refining_marketing/aspenone_supply_distribution.cfm|archive-date=2010-06-08}}</ref>

===Roots===
The use of inventory proportionality in the United States is thought to have been inspired by Japanese [[just-in-time (business)|just-in-time]] parts inventory management made famous by [[Toyota]] Motors in the 1980s.<ref>{{cite web |url=http://www.bsu.edu/web/scfrazier2/jit/mainpage.htm |title=JIT Manufacturing |access-date=2010-03-24 |url-status=dead |archive-url=https://web.archive.org/web/20100425054824/http://www.bsu.edu/web/scfrazier2/jit/mainpage.htm |archive-date=2010-04-25 }}</ref>