OF (INVENTORY MANAGEMENT- WHOLESALE/RETAIL)

Acknowledgement:I am thankful to !" T#nmo$ #%g&'t# for providing me the task of preparing the Term Paper. We at B.U believe in taking challenges and the term paper provided me the opportunit to tackle a practical challenge in the sub!ect of Operation management. This term paper tested m patience at ever step of preparation but the courage provided b m teachers helped me to s"im against the tide and move against the "ind. I am also thankful to m friends and parents for providing me help at ever step of preparation of the Term Paper.

I#$%#TO&' MANAGEMENT- WHOLESALE/RETAIL A(STRA)T Three Rights The marketing success of man businesses depends upon their abilit to provide the customer "ith the right merchandise in the right place at the right time. The right merchandise is the item that the customer desires( the right place is in our inventor ) not a supplier*s "arehouse( the right time is immediatel . Failure to have the right merchandise in the right place at the right time can often lead to lost sales and) even "orse) to lost customers. If the cannot purchase "hat the "ant toda from our business) ou "ill lose sales and our competition "ill gain customers. Capital Restriction +aintenance of ade,uate inventories to meet all customer re,uirements "ould be eas if ou had unlimited mone available to ac,uire it. Unfortunatel ) this is rarel ) if ever) the case. In most small businesses capital for inventories is limited and inventor levels must be held "ithin these limits. %-cessive inventor investments can tie up capital that ma be sorel needed for other purposes. Therefore) the basic problem confronting small business management is to maintain inventor investments at reasonable levels "hile providing sufficient inventor to meet market demands. Adapt to Your Own Busine%% +an of the techni,ues described are general guidelines that must be adapted to the needs of our customers) our business) and our available capital. If ou appl these techni,ues) liberall sprinkled "ith our o"n professional !udgment) ou "ill not onl

be able to detect problems as earl as possible but ou "ill also be able to prevent man potential problems from ever occurring. Int!od&ct*on 'ou are in trouble if ou have to keep telling customers) .I*m sorr "e*re out of that si/e. +a "e order it for ou0. %ven though the shirts are selling briskl ) ou "ill lose customers if ou don*t have an item in stock. When the customer spends) ou have got to be read "ith the goods. This is "hat inventor management is all about. In man retail and "holesale operations) the single largest asset is inventor . 1ontrol of this investment is vital. It "ill eliminate a number of the problems associated "ith capital shortages and "ill also provide capital to permit e-pansion of operations for increased sales and profit. Need +o! ,!om't Act*on Inventor problems often re,uire prompt corrective action. In man businesses) the market life of inventor is short and if inventor is insufficient "hen market demand peaks) sales and profits are lost. If inventor is e-cessive "hen demand declines) the e-cess must be cleared) often at sharpl reduced prices) again affecting profits. These special problems are particularl acute in certain businesses. The market life for the latest hit record ma be !ust a fe" months. For seasonal greeting cards) the market life is a fe" "eeks) and for fresh fruit) produce and baked goods) the market life is measured in da s. )ont!oll*ng In-ento!$ Le-el% 'ou can control the inventor levels in our business to provide a suitable assortment and suppl to meet market re,uirements "hile minimi/ing the risk of e-cessive investments. This can be accomplished b 2 34 Investing in inventor "isel so that e-cessive capital is not tied up) e-cessive space is not re,uired) and the investment does not force unnecessar borro"ing and interest e-pense.

54 +aintaining accurate) up6to6date records to help identif and prevent shortages and to serve as a database for decisions. 74 Taking prompt action to correct inventor imbalances. In-ento!$ M#n#gement Inventor management can be briefl described as2 Inventor management is primaril about specif ing the si/e and placement of stocked goods. Inventor management is re,uired at different locations "ithin a facilit or "ithin multiple locations of a suppl net"ork to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventor management also concerns the fine lines bet"een replenishment lead time) carr ing costs of inventor ) asset management) inventor forecasting) inventor valuation) inventor visibilit ) future inventor price forecasting) ph sical inventor ) available ph sical space for inventor ) ,ualit management) replenishment) returns and defective goods and demand forecasting. Balancing these competing re,uirements leads to optimal inventor levels) "hich is an on6going process as the business needs shift and react to the "ider environment. 34 8c,uiring an ade,uate suppl and assortment of merchandise from "hich customers can bu . 54 Providing safet stocks to meet une-pected demand or dela s in inventor replenishment. 74 +aintaining clear) correct) and current records. 94 Purchasing the proper assortment of goods in ,uantities that "ill maintain inventor levels consistent "ith business re,uirements) "hile providing ade,uate safet stocks. :4 &educing e-cessive inventories promptl ) so that the dollars reali/ed from clearing overstocks can be invested in merchandise "ith a greater market potential.

The reasons for keeping stock

There are three basic reasons for keeping an inventor 2 3. Time 6 The time lags present in the suppl chain) from supplier to user at ever stage) re,uires that ou maintain certain amount of inventor to use in this .lead time. 5. Uncertaint 6 Inventories are maintained as buffers to meet uncertainties in demand) suppl and movements of goods. 7. %conomies of scale 6 Ideal condition of .one unit at a time at a place "here user needs it) "hen he needs it. principle tends to incur lots of costs in terms of logistics. ;o bulk bu ing) movement and storing brings in economies of scale) thus inventor . +ost manufacturing organi/ations usuall divide their .goods for sale. inventor into2

&a" materials 6 materials and components scheduled for use in making a product. Work in process) WIP 6 materials and components that have begun their transformation to finished goods. Finished goods 6 goods read for sale to customers. <oods for resale 6 returned goods that are salable.

,&!'o%e

Inventor

proportionalit

is the goal of demand driven inventor

management. The

primar optimal outcome is to have the same number of da s (or hours) etc.4 "orth of inventor on hand across all products so that the time of run out of all products "ould be simultaneous. In such a case) there is no .e-cess inventor .) that is ) inventor that "ould be left over of another product "hen the first product runs out. %-cess inventor is sub6optimal because the mone spent to obtain it could have been deplo ed better else"here) i.e. to the product that !ust ran out. The secondar goal of inventor proportionalit is inventor minimi/ation. B

integrating accurate demand forecasting "ith inventor

management) replenishment

inventories can be scheduled to arrive !ust in time to replenish the product destined to run out first) "hile at the same time balancing out the inventor suppl of all products to make their inventories more proportional) and thereb closer to achieving the primar goal. 8ccurate demand forecasting also allo"s the desired inventor proportions to be d namic b determining e-pected sales out into the future( this allo"s for inventor to be in proportion to e-pected short term sales or consumption rather than to past averages) a much more accurate and optimal outcome. Integrating demand forecasting "ith inventor management in this "a also allo"s for the prediction of the .can fit. point "hen inventor storage is limited on a per product basis.

In-ento!$ In-e%tment )ont!ol Inventor investment control is accomplished in t"o "a s2 34 Prompt elimination of overstocked items. 54 Inventor replenishment in anticipation of customer demand. Whenever a particular item is overstocked) the overstock should be reduced as promptl as possible. #aturall ) the most effective and profitable "a is to sell it to customers) even at a discount. =o"ever) there are other possibilities. There ma be a "holesale market available for certain kinds of inventor . %-cessive consumer goods inventories are often sold to .bargain basements. or "arehouse outlets. Perhaps ou can even

arrange "holesale sales to a competitor. Fre,uentl ) it is "iser to scrap inventor that sho"s no sales activit for an e-tended period of time. In this "a ) ou reduce a misleading overstatement of inventor on our compan *s books. 8t the same time) ou make space available for inventor that can be sold at a profit.

.#cto!% t/#t #++ect *n-ento!$ m#n#gement EMAN 0>emand is the number of items re,uired per period "hich is not necessaril e,ual amount sold as some demand ma go unfulfilled because of storage or dela s. The demand ma be of t"o t pes 26 >eterministic >emand(6 If the number of items re,uired (i.e. demand4 in a subse,uent period of time is kno"n then such demand are called deterministic demands. #on >eterministic demand(6 If the demand over a subse,uent period of time is not kno"n "ith certaint then such demands are called non6deterministic or probabilistic demand.

Le#d T*me 0-

The time gap bet"een the time of placing an order or the starting of the production and the time of arrival or deliver of goods to the inventor is called lead time. Amo&nt el*-e!ed:The suppl of goods ma be instantaneous or spread over a period of time.

In-ento!$ Re'len*%/ment The ke to successful inventor management is adherence to procedures for inventor replenishment. 'our abilit to anticipate customer demand for certain items "ill help ou plan our inventor purchases so that sufficient stocks are on hand to accommodate sales volume "ithout e-cesses that cause other problems. Planning our purchases "ill also help ou avoid shortages that can onl be filled through forfeiture of discounts or absorption of premium shipping charges. In an business) an appropriate inventor level should be calculated b considering e-pected sales in the coming period. For products that sho" a stead sales pattern regardless of season or current fads) this can be based upon average monthl sales. S#le% .o!ec#%t*ng The first step in estimating e-pected sales in coming months is to calculate) from inventor records) actual sales during an appropriate revie" period. For e-ample) if ou "ant to determine an appropriate inventor level for ski boots on October 3) it "ill be of little value to consider sales in ?ul ) 8ugust) or ;eptember. 8verage monthl sales for the entire ear "ill tell ou little or nothing either. 8 more suitable revie" period "ould be the months of October) #ovember) and >ecember of the previous ear. In addition) if our sales sho"ed a ear6to6 ear gro"th rate) ou should ad!ust revie" period sales for the average sales gro"th that our business has e-perienced in the previous ear.

1onsider the follo"ing e-ample. 8 sporting goods store desires to maintain a three months* suppl of ski boots in inventor . On October 3) the store is determining a suitable inventor level so that an order can be prepared to build inventor to the three6 month level. ;ales of ski boots have increased 5@A from ear to ear. ;ales in October) #ovember) and >ecember of the previous ear "ere as follo"s2 October :) #ovember 3@) >ecember 5@ 8dding 5@A to each of these amounts to reflect sales gro"th) e-pected sales for the present ear "ould be as follo"s2 October B) #ovember 35) >ecember 59 %-pected sales for the three6month period "ould then be 95 (B C 35 C 594. Therefore) the store should tr to have this ,uantit in inventor on October 3. 8nother factor that should be considered in demand forecasting is "hether or not stock outs that prevented a customer re,uest from being fulfilled affected sales during the revie" period. Forecasting re,uires measurement of customer demand for a particular item) the number of pieces that customers "ished to purchase) not !ust those orders that ou "ere able to sell. If information is available) such re,uests should be added to actual sales for the revie" period in order to reach a more realistic estimate of demand for the coming months. In some businesses) accurate records are maintained of all unfulfilled customer re,uests. This permits management to establish more accurate demand figures in determining inventor inventor . E%t#1l*%/*ng In-ento!$ G&*del*ne% Product shelf life ma be the determining factor. If the grocer stocked more than a t"o da s* suppl of muffins) the "ould lose their freshness and the grocer "ould lose customers. >eliver is immediate. The grocer gives the order directl to the baker truck driver and the driver fills the order in minutes. replenishment re,uirements and making decisions to add ne" items to

+ore often) there are man other factors to consider. Take the case of the retailer "ho ma re,uire t"o "eeks to receive deliver from suppliers on most items. On an emergenc basis) the retailer ma be able to replenish inventor more promptl ) but onl b forfeiting ,uantit discounts or incurring e-tra deliver charges. For most items) it is better to accept normal deliver ) taking full advantage of all available discounts and minimi/ing freight charges. The si/e of the safet stock "ill depend upon the number and e-tent of the factors that could interrupt deliveries. ;uitable guidelines "ould have to be based upon our o"n e-perience in the industr . 8dditionall ) man items re,uire a basic stock) an amount sufficient to accommodate regular sales) offering customers a reasonable assortment of merchandise from "hich their selection can be made. Ot/e! O!de!*ng )on%*de!#t*on% #o business can be run b formulas alone. But formulas can be useful in guiding decisions. Before stra ing from them) ou should be sure to have good and sufficient reason. One common reason for stra ing from the ordering formulas previousl described is the availabilit of ,uantit discounts and price specials. #aturall ) ou "ant to take advantage of these potential savings "henever possible. =o"ever) if ,uantit discounts force ou to order far more than ou need) the discount ou earn ma later be lost "hen ou are forced to close out the merchandise at distress prices. M#*nt#*n*ng )ont!ol ; stematic revie" of inventor purchases is the most effective means of preventing overstocks and avoiding lost sales. The availabilit records) combined "ith decisions. ,e!*od*c In-ento!$ )/#nge% of accurate inventor and sales ou to sound purchasing our o"n !udgment) can guide

Inventor inventor

levels are constantl at the end of an

changing. 8s goods are purchased or produced) ou begin "ith the inventor on hand at the

inventories increase. 8s goods are sold) inventories are reduced. To determine the period) beginning of the period. Then) the ending inventor can be calculated as follo"s2 Opening Inventor C 8dditions to Inventor during the period 6 >eductions from Inventor during the period D %nding Inventor For e-ample) a "holesaler of furniture has 3@@ mattresses in inventor on 8pril 3. >uring the month) :@ mattresses are received and 5 are returned from customers. Total additions to inventor for the month "ould be2 :@ Productions C 5 &eturns D:5 Total 8dditions ;ales of mattresses during the month are 9@ and 3 must be scrapped because of "arehouse handling damage. Total deductions from inventor "ould then be as follo"s2 9@ ;ales C 3 ;crapped D 93 Total >eductions The closing inventor on 8pril 7@ can then be calculated as follo"s2 3@@ Opening Inventor ) 8pril 3 C :5 8dditions to Inventor ) 8pril 6 93 >eductions from Inventor ) 8pril D 333 1losing Inventor ) 8pril 7@ 8dditions to inventor normall include the follo"ing2 34 Purchases 54 &eturns from customers >eductions from inventor normall include2 34 ;ales 54 &eturns to vendors 74 ;crap page 94 Pilferage :4 Inventor ad!ustments In-ento!$ V#l&#t*on

Inventor calculations) based upon units) are useful "hen determining the inventor of a particular item. +ore often) ho"ever) inventor ) particularl ou "ill "ant to kno" the dollar value of our total inventor . Total inventor can be evaluated in total

dollars onl since it usuall includes a mi- of various items such as apples and oranges) "hich cannot be added together.

Reco!d*ng In-ento!$ Purpose To manage our inventor successfull ) ou should maintain accurate and up6to6date records of sales and stock on hand for ever item that ou sell. Inventor records tell ou "hat ou have. ;ales records tell ou "hat ou need. Inventor records are used for making the follo"ing decisions2 34 Purchases for inventor replenishment. 54 ;crapping or clearing of obsolete items that are no longer in demand. 74 8ddition of ne" items to inventor . S$%tem The best t pe of s stem for our business depends largel upon the number of different items ou carr in inventor . 8 retail bic cle shop might carr 9@ or :@ items in inventor ) a bookstore might have a fe" hundred titles) and a plumbing suppl house might carr several thousand different items in inventor . ,/$%*c#l In-ento!$ 8 ph sical inventor should be taken periodicall to be sure that the actual ,uantities on hand e,ual those sho"n on the inventor records. The inventor records must then be ad!usted to reflect an difference bet"een .ph sical inventor . and .book inventor ). the ,uantities sho"n on the inventor records. The actual ,uantit of each item on hand

must be counted and compared "ith that sho"n on the inventor record. #ecessar ad!ustments should be made immediatel . >ifferences bet"een book and ph sical inventor arise for man reasons. The most easil understood) of course) is pilferage. 8n inventor control s stem to detect this situation as earl as possible. Other reasons for inventor shortages are some"hat more subtle but e,uall damaging) if not "orse. For e-ample) if our receiving procedures are fault ) a receiving clerk ma not be counting actual ,uantities received and comparing them "ith those on the vendor*s packing list or invoice. If the ,uantit invoiced to ou) actuall received is less than that be sold to ou are pa ing for the difference. +erchandise ma business naturall "ants to maintain an

customers "ithout being billed to them) through oversight or carelessness. In these cases) ou "ill take a loss e,ual to our cost of the product and also lose the profit that ou should have earned on the sale. 1lerks ma be accepting customer returns of merchandise that are no longer saleable because of damage) stains) or packing defects. 'ou ma be ignoring opportunities to return merchandise to vendors "hen it arrives in an unfit condition for resale. 8n of these factors can result in inventor shortages. While most businesses take careful steps to guard against theft) relativel fe" adopt serious procedures for protection from inventor shortages caused b such factors as poor receiving procedures) poor billing procedures) and merchandise damage. )om'#!*%on% o+ In-ento!$ R#t*o% %-pressing inventor in terms of turnover rate or e,uivalent monthl sales permits comparison of our current inventor level "ith an of the follo"ing2 34 Industr averages. 54 Inventor levels in previous periods. 74 'our inventor policies.

1omparison of inventor E5:)@@@ and the industr inventor

levels in absolute dollars "ith similar businesses or "ith average is E9:)@@@) this does not tell ou "hether our "as

previous periods provides little insight. For e-ample) if our current inventor level is is too high or too lo". =o"ever) if ou found that our inventor

e,uivalent to 5 months* average sales and the industr average "as 3.: months* sales) ou "ould kno" that our inventor is probabl higher than needed to support our sales volume. (Industr averages are available from local offices of our industr trade association or at our public librar .4 1omparison of our current inventor suppl or turnover rate "ith our performance in previous periods "ill also tell ou "hether or not our inventor control is improving or slipping. +an businesses establish policies for inventor levels based upon e-pected sales. This information is useful in controlling inventor investment and planning financial re,uirements. 8ssume that a store had a polic of maintaining a : "eeks* suppl of inventor . If the actual inventor reached a B "eeks* suppl ) then inventories must be cleared or purchasing temporaril slo"ed until inventor is reduced to the :6 "eek level. On the other hand) if inventor declined to a 9 "eeks* suppl ) it "ould indicate that more merchandise should probabl be ordered to avoid lost sales. Ind*-*d&#l Item An#l$%*% These same anal sis techni,ues can be applied to inventories of individual items so that prompt corrective action can be taken. One common cause of apparentl e-cessive inventories is that man inventor dollars are tied up in slo"6moving items that ma ) in fact) no longer be marketable. 8lthough the total inventor investment appears ade,uate or even e-cessive) sales are lost because capital is tied up in slo"6moving items. This capital could be more profitabl invested in faster moving inventor that "ould have a far higher sales and profit potential. These individual problems can be detected b periodic measurement of the months* suppl of individual items so that overstocks can be detected and action taken to e,ual to 7 average months* sales. eliminate the overstocks and free cash for more profitable investment else"here. For e-ample) a store might have a total inventor

%-amination of individual inventor overstocks.

records reveals that man

items have supplies

e,uivalent to 35 months* sales or more. Prompt action should be taken to reduce these

,RO(LEM I ENTI.I)ATION Ratios of Sales to Invento!$ Inventor ,uantities are often e-pressed in terms of an e,uivalent number of da s*) "eeks*) or months* sales. For e-ample) a retailer of automotive parts might maintain a t"o6months* suppl of fast6moving items. This means that it has a sufficient ,uantit on hand to fill e-pected sales in the coming t"o6month period. 8 produce broker) faced "ith problems of spoilage and high6cost refrigerated storage space) "ould carr a much smaller inventor ) perhaps !ust a fe" da s* suppl . >etermining our inventor levels in terms of an e,uivalent number of da s*) "eeks*) or months* suppl permits ou to do the follo"ing2 34 1ompare our o"n inventor levels "ith similar businesses to detect e-cesses that should be corrected. 54 %valuate the inventor of individual items so that prompt action can be taken to correct shortages or e-cesses. 74 %stablish replenishment policies so that inventories can be sustained at realistic levels) minimi/ing the possibilit of lost sales or e-cessive investments. Fater) "e "ill see ho" sales6inventor ratios can be used to accomplish the preceding

ob!ectives) but first "e must consider ho" the ratios are calculated.

With the help of different material control techni,ues a purchase manager can take decision "hether to bu ra" material as %.O.G. or "ith a discount at a particular lotsi/e. With the help of a follo"ing e-ample a purchase manager can take decision "hich one is more suitable for his compan . 8nnual demand for a particular item of inventor is 3@)@@@ units. Inventor carr ing cost per unit per ear is 5@A and ordering cost is &s.9@ per order. The price ,uoted b the supplier is &s.9 per unit. =o"ever) the supplier is "illing to give discount of :A for orders of 3):@@ units or more. Is it "orth"hile to avail of the discount offer0 )AL)2LATION O. TOTAL )OST 2N ER EO3 WITHO2T IS)O2NT ;elling price per unit 1arr ing cost per unit per ear Ordering cost per order Ordering Guantit per order (ordering ,uantit under "ith out discount price "ill be %.O.G. because it "ill give lo"est cost4 Purchase cost for annual re,uirement of 3@)@@@ units Ordering 1ost 1arr ing cost for 8verage inventor ) i.e. carr ing cost for half of ordering ,uantit &s.9 5@A of &s.9 D &s. @.H@ &s. 9@ I(5J3@)@@@J&s.9@K &s.@.H@ 4 D 3)@@@ units &s.9@)@@@ (3@)@@@units L&s94 &s.9@@ (For 3@ orders L&s.9@4 &s.9@@ (3)@@@K5J&s.@.H@4 &s. 9@)H@@

Tot#l )o%t

)AL)2LATION O. TOTAL )OST 2N ER WITH IS)O2NT

;elling price per unit 1arr ing cost per unit per ear Ordering cost per order Ordering Guantit per order (ordering ,uantit under "ith out discount price "ill be %.O.G. because it "ill give lo"est cost4 Purchase cost for annual re,uirement of 3@)@@@ units Ordering 1ost 1arr ing cost for 8verage inventor ) i.e. carr ing cost for half of ordering ,uantit

&s.7.H@Mi.e. &s9 N (:K3@@J&s.94O 5@A of &s.7.H@ D &s. @.PB &s. 9@ 3):@@units &s.7H)@@@ (3@)@@@units L&s7.H@4 &s.5H@ (For P orders L&s.9@4 &s.:P@ (3):@@K5J&s.@.PB4 &s. 7H)H:@

Tot#l )o%t
;aving on >iscount Offer &s.(9@)H@@67H)H:@4 D &s.3)Q:@

Hence, discount offer of 5% should be availed and ordering quantity should be 1,500 units.

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