Inventory Costs

One of the key decisions an operations manager has to take is the quantity of the goods to be ordered. The order quantity is generally decided after taking into account the following costs - Purchase costs, Carrying costs, Ordering costs, Stock-out costs. Exhibit 10.2 describes how an organization can improve profitability by effectively managing inventory and despite the various costs involved.               

Exhibit 

Inventory Management in Retailing

Among most of the service industries, retailing is one of the sectors where inventory management is critical for smooth operations. For retailers, warehouses and distribution centers have important place in overall operations. For on-line retailers, success depends on how much control they have on their inventory. There should be a proper coordination between order taking system and back-end order processing system. Retailers operate through multichannel system, integrating these channels to a single supplying system at times can be complex and error prone. So many retailers maintain multiple warehouses or distribution centers catering to specific channels.

Another important aspect of retailing involves keeping track of the available inventories and how inventory is replenished and issued. Retailers have to deal with loss, theft, damages and also stock-outs. Retailers gain competitive advantage over other retailers based on the age of the inventory they stock. Retailers stocking recent and in-demand items can improve their standing in the market. The strategy to have the latest products on offering many a times results in obsolescence of the current inventory. Further the retailers deal with finished goods inventory, which has short life cycle.

To improve the inventory control system, big retailers often institute a partnership with the channel suppliers. For example Wal-Mart tied up with Fingerhut Business services for its Internet based store Wal-Mart.com. Under this kind of arrangement, suppliers are paid only after an item is sold. As a result, the inventory is managed and controlled by suppliers and manufacturers. But many suppliers do not approve such arrangements, as they cannot simultaneously perform two jobs.

Initially retailers were involved in both promoting and distributing the stocks but currently manufacturers are promoting products and retailer are concerned only with providing shelf space for the products and providing good ambiance to the shoppers

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