Posts tagged ‘FEATURE’

Inventory Theory

Inventory theory says that the amount of total inventory that needs to be held to satisfy demand is proportional to the number of inventory stocking points.  The most efficient (from purely an inventory size standpoint- there are other efficiency issues that mitigate against this) is one big single shared inventory.  The least efficient is every individual holding his/her own inventory.  Glen Reynolds points to this effect in food:

I SAW A FEATURE BY TONY CAVUTO last night on food stockpiling, in which
one of his correspondents explained how he'd spent \$1500 at Costco
stocking up against shortages. You know, if you have stories like this
on TV regularly, you'll get food shortages at stores even if there's no
actual shortage in supply, because today's just-in-time inventory
practices mean that there's no real slack for sudden increases in
demand. The empty shelves will then promote panic and more stockpiling,
setting the stage for the equivalent of a bank-run on grocery stores
even if there's no actual reason.

The exact same thing happened in the early 1970s with gasoline**.  Imagine that there are 100 million cars, and each fills up when the tank is 1/4 full.  On average, then, every tank is 5/8 full.  If tanks are all 16 gallons, then there are a billion gallons of gas in people's personal gasoline "inventory."  Now imagine due to some perceived crisis everyone changes their policy and fills up when the tank is only half empty.  Then, on average, every tank is 3/4 full, giving a total inventory of 1.2 billion gallons.  If this panic occurs over a period of a few days, suddenly there is an incremental demand, above and beyond normal demand, of 200 million gallons to expand personal inventories.  That as much as 30,000 tanker truck loads of extra demand at retail in a few days.  When stations run out, and people change their policy to fill up at 3/4 (as many did in those times, in panic) then that causes another 200 million gallons to disappear into personal inventories.  Logistics systems are not built to handle these demands.

**Postscript:
By the way, don't let the US government off the hook.  In the wake of the 1972 oil crisis, the main Congressional "contribution" was to pass a law that mandated oil companies deliver gasoline to each geographic area (probably by county, but I am not sure) in the same proportion as they did in the previous year.  A sort of directive 10-289 for gas distribution.  Well, we all know that things change, and among the biggest changes was the fact that with uncertain supplies and higher prices, a lot fewer people were driving on highways.  Because of Congress's action, rural interstate gas stations were swimming in gas, and the cities were out.  In a cruel but totally predictable twist, a number of the Congressmen who voted for this law later demagogued against oil companies for their poor distribution of gasoline that summer.