Note: - The entire content below mentioned is based on the intensive reading and experience

in warehouse management, fulfillment, and retail experience. Hence the entire content will be
more of a retail side.
INVENTORY MANAGEMENT

Introduction
One of the important areas in supply chain management is inventory management which
Involves A)Raw materials B)WIP work in progress inventory c) Finished inventory hence
proper planning concerning inventory is very important because the entire capacity of the
facility like production, warehousing & storage, Distribution & fulfillment is required to be set
to meet the demand. The entire objective of the supply chain is to meet the demand by the
strategy of efficiency and responsiveness but at a time it’s very difficult to maintain efficiency
and responsiveness at 100% because the efficiency and responsiveness are inversely
proportional, hence companies like e.g. Zara maintain a mix of both, for trending apparels Zara
as maintained in-house production and for the apparels were demand is constant the production
is outsourced this strategy enables the company to be competitive in the market.
E.g. the entire demand for a region for a product A is 1000 then entire facilities
such as production, warehousing & storage, Distribution & fulfillment is set to meet the
demand of 1000. But for the E.g. just mentioned is not an ideal condition because the future is
always unpredictable E.g. Because of the pandemic of COVID-19 the economy as slow down
and because of that the source of income for the customers as changed hence there buying
pattern will also change E.g. a customer before COVID-19 who spends Rs 20000 for essentials
per month and Rs 30000 for luxury goods after the COVID-19 the customer will spend Rs
20000 for essential per month and there will be a drastic decrease in the amount spend for
luxury goods from RS 30000 to null for goods like jewelry, expensive electronic gadgets…etc.
Hence what we can do is proper forecasting of demand by considering various factors like
seasonality demand, understanding market conditions…etc and follow the strategies like
MTS(Make to stock) for products having constant demand and MTO(Make to order) or
ATO(Assemble to order) depending upon the degree of demand fluctuations.
As per the Lean concepts there 8 types of waste 1) Defects 2) Excess Processing
3) Overproduction 4) Waiting 5) Inventory 6) Transportation 7) Motion 8) Non-Utilized Talent.
That is other than optimum inventory, inventory is considered as a waste
The above-mentioned content summarizes that the quantity of
demand decides the quantity of inventory such raw materials to WIP(Work in progress) to
finished inventory and the Quantity of inventory decides capacity of the facilities hence by
proper forecasting of demand planning helps to reduce the cost of entire supply chain and
decide the facility capacity with a certain degree of flexibility since the future is unpredictable.
How business works
E.g. If a retail outlet A bought an inventory of qty 1000 units from the vendor B at cost
prise RS 10/unit and selling price is 20/unit and the credit period is 30 days and if the payment
is not made within the credit period then as penalty 2% interest will be charged per day on cost
prise.
Therefore
Total cost prises=1000*10=Rs10000 -à eq1
Selling price=1000*20=Rs20000-àeq2
Profit=eq2-eq1=20000-10000=Rs10000
Case 1) If 1000 units been sold by the retail store A within 30 days
Then the retail store will be able to pay the vendor B RS 10000 and the retail store A
will be able to earn Rs 10000 as profit without any penalty.
Case2) If Retail store took 60 days to sell the 1000 units
Then the retail store A needs to pay cost price Rs 10000 in addition to that the store
needs to pay penalty for the due days that is the extra days taken apart from the credit period
that is 30 days i.e. (10000*2%) *30=Rs6000. Therefore, the total amount the retail store A
needs to pay vendor B is RS 10000+Rs6000=Rs16000. In this situation, the profit earned by
the retail store is RS 4000 because of the penalty Rs 60000.

Hence whenever we purchase the inventory the qty of inventory should be less than or equal
to the credit period. In addition to the penalty, there will be incurring additional costs such as
space utilization, maintenance cost, aging stock…etc.
How Inventory can be managed at a retail store.
1. Restricting the number of SKU to optimum number
Why
• As the number of SKU increases inventory increases.
• When a new SKU is going to be introduced there are chances that least selling SKU is
not removed if the restriction is not maintained.
• If a proper replacement is not done against the least selling SKU by removing the least
selling SKU and replace with the new SKU, there are chances that we will be
purchasing both least selling and the new SKU.
Solution
• After a discussion with the sales and marketing team, we can come to an Optimum
number of SKU’s that need to be maintained.
• At regular intervals revising the assortment role (means classifying SKU into 3
categories A) Top-selling SKU: -Are those SKU which provide 80% of the sales. B)
Medium selling -Are those SKUs which provide 15% of the sales. C)Least selling - Are
those SKUs which provide 5% of the sales. The basic principle we can use here is the
80-20 rule. (“Need to be strictly followed since there is a great role of assortment role
in order placing”)
• The procedure that needs to be followed for introducing new SKU should be that, one
of the least selling SKU should be removed and the least selling SKU should be allowed
to be removed once the Stock on hand becomes Zero and then the new SKU should be
introduced as Medium selling. Therefore, the net effect will be Zero.
“The above-mentioned practice is followed by retail leaders such as Walmart and 7-Eleven.”
2)Try to Include sale or return contracts with vendors at least for medium and least selling
inventory.
3)Try to maintain milk run transportation system to obtain the benefit of FTL (Full Truck Load)
and warehousing should be majorly used for Cross-docking and storage should happen in
exceptional cases only e.g.
A) If the supplier is not able to provide within the stipulated period because of
manufacturing plant Maintenance or because of the non-availability of raw material.
B) If the supplier is going to increase the price
4) Instead of purchasing bulk stocks for a long period of time for medium and least selling
SKU increase the replenishment cycle for medium and least selling SKU and try to opt for
direct supply from the manufacturer instead of storing and rooting through DC keeping in my
mind economic of scale.
5) Helping and coordinating with suppliers to make them aligned e.g. Toyota, Walmart
maintain’ s long term relationship with there suppliers and help each other to ensure on-time
delivery. Try to maintain least no of suppliers which helps to improve the coordination.
.
6) While placing an order 3 things need to be considered
A) Max No: of days we are planning to keep the stock it should not be more than the credit
period provided by the supplier and if the product is perishable MAX DOH should not be more
than the expiry date. MAX DOH=No: of days * Avg daily sales
B) Lead Time DOH
Lead time stock=AVG Daily Demand * AVG Lead time in days
C) Safety stock
E.g. consider the details mentioned below table
• For a retail store ABC, the sales for 12 months for a product X.
• The lead time agreed by the supplier for the product X is 18 days, but actual lead time
taken for the product X by the supplier is given below.
Months JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC AVG SD LOW MAX
SALES 1653 2361 1587 1311 2125 1369 2028 1491 2206 1804 1100 1585 1718 391 1327 2109
Po_raised 1 2 3 4 5 6 7 8 9 10 11 12
Actual lead time taken 15 10 14 13 10 23 23 21 13 23 24 11 17 6 11 22

Therefore
1. SD of AVG sales is 391 units i.e. sales for a month will be between 1327units and 2109
units and the 391 units is 7 days of stock (391/ (1718/30))
2. SD of AVG lead time is 6 days i.e. lead time will be between 11 days and days.
I.e. to prevent 100% uncertainty, the retail store needs to maintain 13 days
of safety stock. If a retail store decides to prevent 50% uncertainty the retail store needs to
maintain 6.5 days of safety stock.
ROP (Re-order point) = MAX DOH- (Lead time DOH + Safety stock DOH)
One of the major challenges of the above-mentioned method is ordering
and carrying cost is been not considered.
6)Fixed Periodic review of Re-order point, safety stock, and max stock.

Thank You
Josan Abraham