Page 217 - DMGT551_RETAIL_BUSINESS_ENVIRONMENT

Retail Business Environment

Notes Advantages

Less cost to operate system
Administratively easier in multi-item situations i.e. easier to place order for each item at
same time.

Though, most of the times the cost of running a Fixed Quantity Replenishment System will be
higher than the than in Fixed Period Replenishment System, the carrying cost will be lesser in
case of Fixed Quantity System. The Fixed Quantity System will be more suitable when:
The number of transactions is low compared with the annual usage
The processing cost of transactions is low compared with the ordering cost

The unit price of items is high
The required service level is high
Sales fluctuations are high
Inventory carrying cost are high

Constraints to Inventory Planning

Following are the factors which may act as constraints to effective inventory planning:

Requires accurate and coordinated forecasts for each distribution centre.
Requires forecasts for each distribution centre and SKU as well as adequate lead-time to
allow product movement.

The errors in forecast may exist because of prediction of demand at wrong location, or
prediction at wrong time.
Requires consistent and reliable performance cycles for movement between distribution
facilities.
Production breakdowns or delivery delays can adversely affect the planning system.

Self Assessment

State whether the following statements are true or false:
1. Raising the level of physical distribution efficiency can result in cost savings for both the
firm and its customers.
2. Ordering costs are incurred in the manufacturing cycle, while setup costs are incurred in
the purchase cycle.

3. Obsolete inventory on the other hand is the inventory that results from an unanticipated
demand.
4. EOQ is the quantity that needs to be ordered in each order which will minimize the total
ordering and carrying cost of inventory.
5. Transit inventories result from the need to transport items or material from one location
to another.
6. A significant cost to retail organizations is the inventory carried to support customers and
sales.

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