Page 222 - DMGT551_RETAIL_BUSINESS_ENVIRONMENT

Unit 11: Physical Distribution and Inventory Management

Notes

Case Study More Effective Inventory Management through

Total Cost Modelling

hile the client was doing an excellent job of tracking acquisition and warehouse-
related costs, they had no effective way of tracking other product costs before
Wand after that limited segment of the inventory management cycle. From
merchandising and administration to managing the product on the store shelves, a more
holistic–and realistic-approach to understanding costs was necessary. Without
understanding these costs, they were relying on ineffective procurement practices, such as
buying larger volumes to achieve per unit savings. Guidon’s modeling experts used careful
Profit and Loss (P&L) analysis and process mapping to create a total cost model which
explores every touch point in the product’s life cycle. Through collaboration and
communication, the Guidon team was able to overcome the silo-related challenges the
client faced and gather end-to-end process information about each SKU, including costs
related to merchandising, marketing, replenishment, delivery and distribution centers,
and retail stores. They identified three key areas of the life cycle to model: Corporate:
Planning, procurement, merchandising, marketing, administration, etc. Distribution Center
(DC): Warehousing, transportation, distribution, etc.
Store functions: Monitoring and maintaining stock, in-store merchandising, managing
returns, etc. By abandoning the company’s previously compartmentalized approach–where
only a few individual silos had a clear understanding of their own SKU-related costs– the
model gave company managers a clear look at costs and opportunities. Redundant tasks
and other inefficiencies became evident in the end-to-end process review, since the model
facilitated transparency between business units. For example, when 100 SKUs were created
for a product line that only needed 25, the superfluous 75 wasted downstream resources.
Reducing those 100 SKUs to 25 reduced the downstream management work created by
each SKU. In addition, costs for such “invisible” expenses as staff time related to a product’s
visual merchandising had to be considered as part of the true cost of the product.
Once the model was completed, the client could immediately see that the actual costs
related to managing inventory include much more than per-unit and warehouse
management costs. Users could easily see whether the total life-cycle costs of buying in
greater quantities would offset or outweigh any savings.

In addition to this enhanced decision-making ability, the client is now able to test a
variety of “what-if” scenarios related to those products being considered as inventory
additions. This helps them determine the true cost of procurement, management, and
distribution before making a commitment to purchase the product. It also shows where
costs expand and shrink throughout the product’s life cycle within the retailer’s inventory
management process. The overall effect is better communication between business units
involved in the product life cycle, further breaking down silos.
Question:
What helps to determine the true cost of procurement, management and distribution
before making a commitment to purchase the produced?
Source: http://www.guidonps.com/default/assets/File/Total_Cost_Modeling_Case_Study.pdf

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