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Retail Business Environment

Notes inventories has declined from 60 percent in the late 1960s to about 40 percent by the end of 2000;
for nondurable goods, the manufacturing share has decreased from 40 percent to about 25
percent over the same period.
This trend is true for all inventory types, be it retail or manufacturing. Companies today must
be fast and nimble enough to react quickly to changes in customer demand and do it with little
inventory to remain competitive in the market.
The challenge for retailers, in reducing inventories, is due to the high value added content of the
inventory because they hold finished products. A significant cost to retail organizations is the
inventory carried to support customers and sales. Companies have to reduce these costs to
maintain competitive advantage and bottom-line benefits.
The challenge of manufacturers is due to the diversity of their inventory holdings which
cumulatively add up to a very high capital commitment for the organization.

Notes Effectively managing and minimizing investments in inventory can certainly help
the organization to manage its manufacturing processes and reduce its costs to stay ahead
of competition.

11.4 Inventory Models

Economic Order Quantity (EOQ)

EOQ is the quantity that needs to be ordered in each order which will minimize the total
ordering and carrying cost of inventory. Thus, the EOQ determines the optimum order quantity
that a company should hold in its inventory given an ordering cost, annual demand and other
the cost of carrying the inventory, so as to minimize the inventory cost. This is modelled as
follows:

2SD
EOQ =
PI
Where
S = Ordering Cost
D = Annual Demand

PI = Cost of carrying one unit of inventory for one year.
The EOQ formula can be modified to determine production levels or order interval lengths, and
is used by large corporations around the world, especially those with large supply chains and
high variable costs per unit of production. However the assumption of uniform demand and
instantaneous supply make the adoption of EOQ model with out modification difficult in real
practice.

Inventory Management System

When stocks are depleted, it is usually too late to place a new order. In inventory management,
a company must pay special attention to two things: the optimal time when an item must be
reordered and the necessary quantity. This is the only way to prevent a shortage in advance.
A company has a number of options for conducting its inventory policies. There are two basic
approaches that are used as to when the order should be placed.

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