Retail Inventory Management & Control

1. Retail Inventory Management

2. Managing Facilitating Goods
Customer
Replenishment Replenishment Replenishment
Order
Order Order Order
Factory Wholesaler Distributor Retailer
Production
Delay
Customer
Shipping Delay Shipping Delay
Item Withdrawn
Wholesaler Distributor Retailer
Inventory Inventory Inventory

3. Think !!!
What and Where is the PROBLEM ?

4. What is Inventory ?

5.  As the cost of logistics increases retailers and manufacturers are
looking to inventory management as a way to control costs.
 Inventory is a term used to describe unsold goods held for sale or
raw materials awaiting manufacture.
 These items may be on the shelves of a store, in the backroom or
in a warehouse miles away from the point of sale. In the case of
manufacturing, they are typically kept at the factory.
 Any goods needed to keep things running beyond the next few
hours are considered inventory.

6. What is Inventory Management
 Inventory management simply means the methods you use to
organize, store and replace inventory, to keep an adequate supply
of goods while minimizing costs.
 Each location where goods are kept will require different methods
of inventory management.
 Keeping an inventory, or stock of goods, is a necessity in retail.
 Customers often prefer to physically touch what they are
considering purchasing, so you must have items on hand. In
addition, most customers prefer to have it now, rather than wait
for something to be ordered from a distributor.
 Every minute that is spent down because the supply of raw
materials was interrupted costs the company unplanned expenses.

7. What is Inventory Control
 Inventory control is the technique of maintaining the size of
the inventory at some desired level keeping in view the best
economic interest of an organization.

8. Types of Inventory

9. Type of Inventory Reason for holding the Inventory
(1) Raw materials
To reap the price advantage
available on seasonal raw
materials.
(2) Work in progress To balance the production flow.
(3) Ready made components When the components are bought rather
than made.
(4) Scraps They are disposal of in bulk.
(5) Finished Goods Lying in stock rooms and waiting
dispatches

10. Purpose of inventory management
◦ Stocking the RIGHT PRODUCT
◦ Able to LOCATE the products
◦ Maintain OPTIMUM LEVEL of inventory

11. Reasons to Hold Inventory
 Meet variations in customer demand:
◦ Meet unexpected demand
◦ Smooth seasonal or cyclical demand
 Pricing related:
◦ Temporary price discounts
◦ Hedge against price increases
◦ Take advantage of quantity discounts
 Process & supply surprises
◦ Internal – upsets in parts of or our own processes
◦ External – delays in incoming goods

12. Objective of Inventory Management
 To maintain a optimum size of inventory for efficient and smooth
production and sales operations
 To maintain a minimum investment in inventories to maximize the
profitability
 The 5 R’s: Effort should be made to place an order at the right
time with right source to acquire the right quantity at the
right price and right quality

13. An Effective Inventory Management Should …
 Ensure a continuous supply of raw materials to facilitate
uninterrupted production
 Maintain sufficient stocks of raw materials in periods of short
supply and anticipate price changes
 Maintain sufficient finished goods inventory for smooth sales
operation, and efficient customer service
 Minimize the carrying cost and time
 Control investment in inventories and keep it at an optimum level

14. An Optimum Inventory Level Involves Three Types of Costs
Ordering costs:- Carrying costs:-
 Quotation or tendering  Warehousing or storage
 Requisitioning  Handling
 Order placing  Clerical and staff
 Transportation  Insurance
 Receiving, inspecting and storing  Interest
 Quality control  Deterioration, shrinkage,
 Clerical and staff evaporation and
obsolescence
Stock-out cost  Taxes
 Loss of sale  Cost of capital
 Failure to meet delivery
commitments

15. Dangers of Over-investment
 Unnecessary tie-up of firm‟s fund and loss of profit – involves
opportunity cost
 Excessive carrying cost
 Risk of liquidity- difficult to convert into cash
 Physical deterioration of inventories while in storage due to
mishandling and improper storage facilities

16. Dangers of Under-investment
 Production hold-ups – loss of labor hours
 Failure to meet delivery commitments
 Customers may shift to competitors which will amount to a
permanent loss to the firm
 May affect the goodwill and image of the firm

17. Maximum Stock Level
Quantity of inventory above which should not be allowed to be
kept. This quantity is fixed keeping in view the disadvantages of
overstocking;
Factors to be considered:
 Amount of capital available.
 Godown space available.
 Possibility of loss.
 Cost of maintaining stores;
 Likely fluctuation in prices;
 Seasonal nature of supply of material;
 Restriction imposed by Govt.;
 Possibility of change in fashion and habit.

18. Minimum Stock Level
 This represents the quantity below which stocks should not be
allowed to fall .
 The level is fixed for all items of stores and the following factors
are taken into account:
1.Lead time-
2. Rate of consumption of the material during the lead time.

19. Re-ordering Level
 It is the point at which if stock of the material in store approaches,
the store keeper should initiate the purchase requisition for fresh
supply of material.
 This level is fixed some where between maximum and minimum
level.

20. Managing Small Items
 Inventory control is simply knowing how much inventory you have.
It is a means to control loss of goods.
 Businesses that use large quantities of small items often use an
“80/20” or ABC rule in which they keep track of 20 percent of the
largest value inventory items and use it to represent the whole.
“A” items are the top valued 20 percent of the company‟s
inventory, both in terms of the cost of the item and the need for
the item in the manufacturing or sales process.
 Controlling this top 20 percent will control 80 percent of their
inventory costs. “B” items are those of mid-range value and “C”
items are cheap and rarely in demand.
 The retailer or manufacturer can now categorize all items in the
inventory into one of these three classes and then monitor the
stock according to value. "A" items would be counted and tracked
regularly, while "B" and "C" items would be counted only monthly
or quarterly.

21. Counting Current Stock
 All businesses must know what they have on hand and evaluate
stock levels with respect to current and forecasted demands.
 You must know what you have in stock to ensure you can meet
the demands of customers and production and to be sure you are
ordering enough stock in the future.
 Counting is also important because it is the only way you will
know if there is a problem with theft occurring at some point in
the supply chain.
 When you become aware of such problems you can take steps to
eliminate them.

22. Cyclical Counting
 Many companies prefer to count inventory on
a cyclical basis to avoid the need for shutting
down operations while stock is counted.
 This means that a particular section of the
warehouse or plant is counted at particular
times, rather than counting all inventory at
once.
 In this way, the company takes a physical
count of inventory, but never counts the
entire inventory at once.
 While this method may be less accurate than
counting the whole, it is much more cost
effective.

23. Controlling Supply and Demand
 Whenever possible, obtain a commitment from a customer for a
purchase.
 In this way, you ensure that the items you order will not take space
in your inventory for long. When this is not possible, you may be
able to share responsibility for the cost of carrying goods with the
salesperson, to ensure that an order placed actually results in a
sale.
 You can also keep a list of goods that can easily be sold to another
party, should a customer cancel. Such goods can be ordered
without prior approval.
 Approval procedures should be arranged around several factors.
You should set minimum and maximum quantities which your
buyers can order without prior approval.
 This ensures that you are maximizing any volume discounts
available through your vendors and preventing over-ordering of
stock. It is also important to require pre-approval on goods with a
high carrying cost.

24. Keeping Accurate Records
 Any time items arrive at or leave a warehouse, accurate
paperwork should be kept, itemizing the goods.
 When inventory arrives, this is when you will find breakage or loss
on the goods you ordered.
 Inventory leaving your warehouse must be counted to prevent loss
between the warehouse and the point of sale.
 Even samples should be recorded, making the salesperson
responsible for the goods until they are returned to the storage
facility.
 Records should be processed quickly, at least in the same day that
the withdrawal of stock occurred.

25. Managing Employees
 Buyers are the employees who make stock purchases for your
company. Reward systems should be set in place that encourage
high levels of customer service and return on investment for the
product lines the buyer manages.
 Warehouse employees should be educated on the costs of
improper inventory management. Be sure they understand that the
lower your profit margin, the more sales must be generated to
make up for the lost goods. Incentive programs can help employees
keep this in perspective. When they see a difference in their
paychecks from poor inventory management, they are more likely
to take precautions to prevent shrinkage.
 Each stock item in your warehouse or back room should have its
own procedures for replenishing the supply. Find the best suppliers
and storage location for each and record this information in official
procedures that can easily be accessed by your employees.

26. Contd…
 Inventory management should be a part of your overall strategic
business plan.
 As the business climate evolves towards a green economy,
businesses are looking for ways to leverage this trend as part of
the “big picture”.
 This can mean reevaluating your supply chain and choosing
products that are environmentally sound.
 It can also mean putting in place recycling procedures for
packaging or other materials.
 In this way, inventory management is more than a means to control
costs; it becomes a way to promote your business.

27. Water Tank Analogy for Inventory
Inventory Level
Supply Rate
Buffers Demand
Inventory Level Rate from Supply
Rate
Demand Rate

28. Bullwhip effect
Demand information is distorted as it moves away from the
end-use customer.
Higher safety stock inventories to are stored to compensate

29. Two Forms of Demand
 Dependent
◦ Demand for items used to produce final
products
◦ Tires stored at a Goodyear plant are an
example of a dependent demand item
 Independent
◦ Demand for items used by external
customers
◦ Cars, appliances, computers, and houses
are examples of independent demand
inventory

30. Independent and Dependent Demand Inventory
Management
 Dependent demand
– “Requirements” / planned
– Materials Requirements Planning / Just in Time
 Independent demand
– Uncertain / forecasted
– Continuous Review / Periodic Review

31. Reasons To Hold Inventory
 Meet variations in customer demand:
◦ Meet unexpected demand
◦ Smooth seasonal or cyclical demand
 Pricing related:
◦ Temporary price discounts
◦ Hedge against price increases
◦ Take advantage of quantity discounts
 Process & supply surprises
◦ Internal – upsets in parts of or our own processes
◦ External – delays in incoming goods
 Transit

32. Reasons NOT To Hold Inventory
 Carrying cost
◦ Financially calculable
 Takes up valuable factory space
◦ Especially for in-process inventory
 Inventory covers up “problems” …
◦ That are best exposed and solved
Driver for increasing inventory turns (finished goods)
and lean production/Just in time for work in process

33. Inventory Hides Problems
Bad
Design
Lengthy Poor
Setups Quality
Machine
Inefficient Unreliable
Breakdown
Layout Supplier

34. To Expose Problems: Reduce Inventory Levels
Bad
Design
Lengthy Poor
Setups Quality
Machine
Inefficient Unreliable
Breakdown
Layout Supplier

35. Remove Sources of Problems and Repeat the Process
Poor
Quality
Lengthy
Setups
Bad
Machine
Design Inefficient Unreliable
Breakdown
Layout Supplier

36. Inventory Cost Structures
 Ordering (or setup) cost
 Carrying (or holding) cost:
◦ Cost of capital
◦ Cost of storage
◦ Cost of obsolescence, deterioration, and loss
 Stock out cost
 Item costs, shipping costs and other cost subject to volume
discounts

37. Typical Inventory Carrying Costs
Costs as % of
Inventory Value
Housing cost:
◦ Building rent or depreciation
6%
◦ Building operating cost (3% - 10%)
◦ Taxes on building
◦ Insurance
Material handling costs:
◦ Equipment, lease, or depreciation 3%
◦ Power (1% - 4%)
◦ Equipment operating cost
3%
Manpower cost from extra handling and supervision (3% - 5%)
Investment costs:
◦ Borrowing costs 10%
◦ Taxes on inventory (6% - 24%)
◦ Insurance on inventory
Pilferage, scrap, and obsolescence 5%
(2% - 10%)
Overall carrying cost
(15% - 50%)

38. Inventory Management Systems
 Functions of Inventory Management
– Track inventory
– How much to order
– When to order
 Prioritization
 Inventory Management Approach
– EOQ
– Continuous / Periodic

39. ABC Prioritization
 Based on “Pareto” concept (80/20 rule) and total usage in
dollars of each item.
 Classification of items as A, B, or C often based on $
volume.
 Purpose: set priorities for management attention.

40. ABC Prioritization
 „A‟ items: 20% of SKUs, 80% of Value
 „B‟ items: 30 % of SKUs, 15% of Value
 „C‟ items: 50 % of SKUs, 5% of Value
 Three classes is arbitrary; could be any number.
 Percents are approximate.
 Danger: Money use may not reflect importance of any given
SKU!

41. Annual Usage of Items by Dollar Value
Percentage of
Annual Usage in Total Dollar
Item Units Unit Cost Dollar Usage Usage
1 5,000 $ 1.50 $ 7,500 2.9%
2 1,500 8.00 12,000 4.7%
3 10,000 10.50 105,000 41.2%
4 6,000 2.00 12,000 4.7%
5 7,500 0.50 3,750 1.5%
6 6,000 13.60 81,600 32.0%
7 5,000 0.75 3,750 1.5%
8 4,500 1.25 5,625 2.2%
9 7,000 2.50 17,500 6.9%
10 3,000 2.00 6,000 2.4%
Total $ 254,725 100.0%

42. ABC Chart For Previous Slide
45.0% 120.0%
40.0%
100.0%
Cumulative % Usage
35.0%
A B C
Percent Usage
30.0% 80.0%
25.0%
60.0%
20.0%
15.0% 40.0%
10.0%
20.0%
5.0%
0.0% 0.0%
3 6 9 2 4 1 10 8 5 7
Item No.
Percentage of Total Dollar Usage Cumulative Percentage

43. ABC Classification
 Class A
◦ 20 % of Inventory
◦ 80 % of value
 Class B
◦ 30 % of Inventory
◦ 15 % of value
 Class C
◦ 50 % of Inventory
◦ 5 % of value

44. ABC Analysis Example
100 — +Class C
+Class B
90 —
Percentage of dollar value Class A
80 —
70 —
60 —
50 —
40 —
30 —
20 —
10 —
0—
10 20 30 40 50 60 70 80 90 100
Percentage of items

45. Inventory Management Approaches
 A-items
– Track carefully (e.g. continuous review)
– Sophisticated forecasting to assure correct levels
 C-items
– Track less frequently (e.g. periodic review)
– Accept risks of too much or too little (depending on the
item)

46. Item Quality Quantity order Checking
A Costlier Less Regular system to see
that there is no
overstocking as well as
that there is no danger
of production being
interrupted for
unwanted material.
B Less costlier Order may be on Position being viewed
review basis. in each month
C Economical Larger Order in large quantity
so that cost can be
avoided

47. Economic Order Quantity (EOQ) Model
 Demand rate D is constant, recurring, and known
 Amount in inventory is known at all times
 Ordering (setup) cost S per order is fixed
 Lead time L is constant and known.
 Unit cost C is constant (no quantity discounts)
 Annual carrying cost is i time the average $ value of the
inventory
 No stockout allowed.
 Material is ordered or produced in a lot or batch and the lot is
received all at once

48. EOQ Lot Size Choice
 There is a trade-off between lot size and inventory
level.
◦ Frequent orders (small lot size): higher ordering cost
and lower holding cost.
◦ Fewer orders (large lot size): lower ordering cost
and higher holding cost.

49. EOQ Inventory Order Cycle
Demand
rate Order qty, Q
Inventory
Level
ave = Q/2
Reorder point, R
0 Lead Lead Time
time time
Order Order Order Order
Placed Received Placed Received
As Q increases, average inventory level increases, but number of orders
placed decreases

50. Total Cost of Inventory – EOQ Model

51. Answer to Inventory Management Questions for EOQ
Model
Keeping track of inventory
◦ Implied that we track continuously
How much to order?
◦ Solve for when the derivative of total cost with respect to Q =
0: -SD/Q^2 + iC/2 = 0
◦ Q = sqrt ( 2SD/iC)
When to order?
◦ Order when inventory falls to the “Reorder Point-level” R so we
will just sell the last item as the new order comes in:
◦ R = DL

52. Re-order Point Example
Demand = 10,000 yds/ year
Lead time = L = 10 days
When inventory falls to R, we order so as not to run out before the
new order comes in.
R=?

53. Re-order Point Example
Demand = 10,000 yds/year
Daily demand = 10,000 / 365 = 27.4 yds/day
Lead time = L = 10 days
R = D*L = (27.4)(10) = 274 yds
(usually can neglect issues of working days vs weekends, etc.)
Don’t forget to convert to consistent time units!

54. EOQ Summary
How much to order?
◦ Q = sqrt(2DS/iC)
When to order?
◦ R = DL

55. Inventory Control Systems
 Continuous system (fixed-order-
quantity)
◦ constant amount ordered when
inventory declines to predetermined
level
 Periodic system (fixed-time-period)
◦ order placed for variable amount
after fixed passage of time

56. Quantity Discounts Model
 Price per unit decreases as order quantity increases
Co D CcQ
TC = + + PD
Q 2
where
P = per unit price of the item
D = annual demand

57. Quantity Discounts Model
ORDER SIZE PRICE
0 - 99 $10 TC = ($10 )
100 – 199 8 (d1)
200+ 6 (d2)
TC (d1 = $8 )
TC (d2 = $6 )
Inventory cost ($)
Carrying cost
Ordering cost
Q(d1 ) = 100 Qopt Q(d2 ) = 200

58. Quantity Discounts Model
QUANTITY PRICE
Co = $2,500
1 - 49 $1,400 Cc = $190 per computer
50 - 89 1,100 D = 200
90+ 900
2CoD 2(2500)(200)
Qopt = = = 72.5 PCs
Cc 190
For Q = 72.5 CoD CcQopt
TC = + 2 + PD = $233,784
Qopt
For Q = 90 CcQ
CoD
TC = + 2 + PD = $194,105
Q

59. EOQ Exercise
 Now you do it
 See Excel Spreadsheet: Excel_Inv_Examples.xls, EOQ tab
 Compute the values of R and Q and compare to the simulation
 Next see what happens when you have volume discounts (EOQ w
Discount Tab)

60. Safety Stocks
 Safety stock
◦ buffer added to on hand inventory during lead time
 Stockout
◦ an inventory shortage
 Service level
◦ probability that the inventory available during lead time
will meet demand

61. Perpetual Inventory System
It is a method of recording stores balances after every receipt and
issue, to facilitate regular checking and obviate closing down for
stock taking.
-Wheldon

62. Factors which are helpful to make system successful
 Stores ledger, stores control, cards or bin cards are properly
maintained ;
 Quantity balance store shown in the store ledger; stock control
and bin cards are reconciled;
 Exploring the cause of discrepancies if any physical balances and
book balances.

63. Daily Inventory Balance Record Product
Month Year
1 2 3 4 5 6 7
Day Opening Physical Deliveries Meter Sales Inventory Should Be Physical Inventory Variation Today Variation This
Inventory Month
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
TOTALS

64. Daily Readings Product
Month Year
Pump 1 Pump 2 Pump 3 Pump 4 Total Tank 1 Tank 2 Total
Meter Dip Inventroy Water Dip Dip Inventroy Water Dip Physical
Day
Readings Sales Readings Sales Readings Sales Readings Sales Sales cm. litres cm. cm. litres cm. Inventory
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31

65. Monthly Summary
Product Product Product
Storage Capacity Storage Capacity Storage Capacity
Total Variation Total Variation Total Variation
% Loss % Loss % Loss
Month Sales for Month Sales for Month Sales for Month

66. Inventory Turnover Method
It means how many times a company‟s inventory is sold and replaced
(finished product)
 Generally calculated as:
Sales/ Inventory
 However it may also be calculated as:
Cost of goods sold/ Average Inventory

67. Reduce your inventory NOW!!!
 Things you can do to free up some cash right now:
 Adjust safety stock
 Reduce safety lead time
 Cut PO quantities in half and double the number of receipts
 Implement supplier kanban (its not that hard)
 Rebalance your A, B, C items and cut back on the C‟s
 Put Purchasing on a strict diet – limit monthly spend to 1/10 of the
annual plan
 Revise the annual plan to reflect current reality
 Suppliers are hungry, so lock in shorter lead times
 Liquidate your slow moving stock: have a Sale
 Reduce production lot sizes