Page 223 - DMGT551_RETAIL_BUSINESS_ENVIRONMENT

Retail Business Environment

Notes 11.7 Summary

Distribution resource planning is important in cost cutting and having the right decisions
regarding the inventory.

Inventory management is a vital part of Logistics Management. The two basic approaches
that are used to determine when an order needs to be placed are Fixed Quantity
Replenishment System and Fixed Interval Replenishment system.
The higher inventory we need to keep, higher will be the carrying cost on the average idle
inventory kept in the warehouse. But, if we purchase inventory in smaller lots and avoid
huge piling of inventory, the cost or ordering and transportation will be higher.

The heart of inventory decisions lies in the identification of inventory costs and optimizing
the costs relative to the operations of the organization: When items should be ordered,
how large the order should be, and “when” and “how many to deliver.”

The following costs are generally associated with inventories: Holding (or carrying) costs,
Cost of ordering, Setup (or production change) costs, and Shortage or Stock-out Costs.
Holding costs increase proportionately with the increase in the inventory level. Obviously,
if the holding costs are high, the organization should try to carry lower inventory and
frequently replenish the stock.

Setup or ordering costs are involved in placing an order or setting up the equipment to
make the product. The ordering cost includes the cost of purchasing, receiving, incoming
inspection and the accounts payable. The costs associated with changing over equipment
from producing one item to producing another are usually referred to as setup costs.
Lost sale reflects the risk of losing the business to competition. There is a trade-off between
carrying stock to satisfy demand and the costs resulting from stock out. The costs that are
incurred as result of running out of stock are known as stock out or shortage costs.

Inventory is by far the single greatest cost that needs to be examined. Material accounts up
between 60–85 percent of the revenue from sales, depending upon the industry.

The most common factors on which the levels of inventory depend are the (a) Production
Rate, (b) Lead-time, (c) Rework/ Scrap Rate, (d) Excess inventory and (e) Obsolete inventory.

11.8 Keywords

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.

Finished Goods Inventory: A finished good is a completed part that is ready for a customer
order.
MRO Goods Inventory: Maintenance, repair, and operating supplies, or MRO goods, are items
that are used to support and maintain the production process and its infrastructure.
Transit Inventories: They 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.

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