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Retail Business Environment

Notes inventory, and MRO goods inventory. Some of these also are know by other names, such as
speculative inventory, safety inventory, and seasonal inventory. We already have briefly
discussed some of the implications of a few of these inventory types, but will now discuss each
in more detail.

Transit Inventory

Transit inventories result from the need to transport items or material from one location to
another, and from the fact that there is some transportation time involved in getting from one
location to another. Sometimes this is referred to as pipeline inventory. Merchandise shipped
by truck or rail can sometimes take days or even weeks to go from a regional warehouse to a
retail facility. Some large firms, such as automobile manufacturers, employ freight consolidators
to pool their transit inventories coming from various locations into one shipping source in
order to take advantage of economies of scale. Of course, this can greatly increase the transit
time for these inventories, hence an increase in the size of the inventory in transit.

Buffer Inventory

As previously stated, inventory is sometimes used to protect against the uncertainties of supply
and demand, as well as unpredictable events such as poor delivery reliability or poor quality of
a supplier’s products. These inventory cushions are often referred to as safety stock. Safety stock
or buffer inventory is any amount held on hand that is over and above that currently needed to
meet demand. Generally, the higher the level of buffer inventory, the better the firm’s customer
service. This occurs because the firm suffers fewer “stock-outs” (when a customer’s order cannot
be immediately filled from existing inventory) and has less need to backorder the item, make
the customer wait until the next order cycle, or even worse, cause the customer to leave empty-
handed to find another supplier. Obviously, the better the customer service the greater the
likelihood of customer satisfaction.

Anticipation Inventory

Oftentimes, firms will purchase and hold inventory that is in excess of their current need in
anticipation of a possible future event. Such events may include a price increase, a seasonal
increase in demand, or even an impending labor strike. This tactic is commonly used by retailers,
who routinely build up inventory months before the demand for their products will be unusually
high (i.e., at Halloween, Christmas, or the back-to-school season). For manufacturers, anticipation
inventory allows them to build up inventory when demand is low (also keeping workers busy
during slack times) so that when demand picks up the increased inventory will be slowly
depleted and the firm does not have to react by increasing production time (along with the
subsequent increase in hiring, training, and other associated labor costs). Therefore, the firm has
avoided both excessive overtime due to increased demand and hiring costs due to increased
demand. It also has avoided layoff costs associated with production cut-backs, or worse, the
idling or shutting down of facilities. This process is sometimes called “smoothing” because it
smoothens the peaks and valleys in demand, allowing the firm to maintain a constant level of
output and a stable workforce.

Decoupling Inventory

Very rarely, if ever, will one see a production facility where every machine in the process
produces at exactly the same rate. In fact, one machine may process parts several times faster

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