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Inventory Management Case Study

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Updated: May 31st, 2019

Inventory management is a very critical component of the operations of any business. The importance of effective inventory management increases in significance when the business in question is a retail chain. A significant portion of the competitive advantage of a supermarket comes from effective inventory management.

This essay relates to inventory management of a large retail supermarket in Singapore faced with general inventory management problems. The aim of this paper is to examine the issues that are causing inventory management problems, and to consider the potential solutions. The company operates more than fifty stores across the country.

The inventory is large because of the nature of retail business. In addition, most of the products are fast moving consumer goods. This means that at any moment, the supermarket is under pressure to avail products in line with consumer demand.

At the same time, the movement of goods must ensure that perishable goods leave the supply chain in time. Otherwise, the company can make losses on damaged products. The paper has two main parts. The first part is a brief examination of the specific problems affecting the inventory management system in the company. The second part of the essay considers the potential solutions to these problems.

Inventory Problems

The company is dealing with three problems related to inventory management. The three problems are stock-outs, excessive inventory, and poor inventory visibility. This section looks at the nature of these three problems in more detail.

Stock-Outs

A stock-out refers to stock exhaustion, which can occur at any point in the supply chain. The main result of a stock-out is lack of goods on the shelves. This leads to loss of sales and can lead to the erosion of the brand image of the store. This situation can occur because of various reasons. These reasons include unavailability of supplies or transport bottlenecks. It can also emerge because of poor shelf replenishment practices in the store.

Excessive Inventory

Excessive inventory occurs whenever the supply chain delivers more goods than a store can offload to consumers. A situation of excessive inventory may occur if the store orders for more goods than it can sell. This situation can occur in case there is a rapid shift in demand patterns.

It can also occur if there is poor communication between the purchasing section and the shop floor. Excessive inventory increases warehousing costs. It also increases the risks associated with dead stock.

Lack of Inventory Visibility

In some cases, inventory may exist in the supply chain without records showing their location. This situation results in artificial shortages and serious accounting difficulties.

Lack of inventory visibility arises from various situations. For instance, an organization that uses continuous ordering process may fail to account for existing stock if it only accounts for stock received and stock released. The general cause of the problem of inventory invisibility is poor inventory management between the warehouse and the store shelves

Methods and Techniques of Handling Inventory Problems

It is possible to solve the problems in the supermarket by using the correct combination of the inventory management methods and techniques. The following section covers certain options that can help the supermarket to increase the efficiency of its inventory management system.

POS Data and Replenishment

The use of Point of Sale (POS) data can help to reduce inventory inefficiencies. The supermarket already has modern POS hardware. These systems work based on the use of barcodes. As the sales clerks charge the clients, the system collects the data relating to goods sold. It is possible to develop a general plan for the replenishing of goods using the data collected from the POS terminals in conjunction with predictive techniques.

The data can tell how fast a certain product is moving, thereby giving signals to the staff to replenish the shelves. This will take care of internal inefficiencies that lead to stock-outs. At the same time, the data can provide information, which the procurement department can use to know when to reorder stock from external suppliers.

ABC Analysis and Inventory Management

The ABC analysis is the second technique the supermarket can use to improve its inventory management. This technique works by helping in the identification of goods that have a high value in the inventory. Thereafter, the company commits more resources towards the management of the inventory of these goods. The product categories that have a lower value should attract fewer inventory management resources.

The three letters of the ABC analysis correspond to the three levels of value each item in the supply chain brings. The ABC analysis shares a philosophy with the PARETO Principle. The PARETO Principle states that twenty percent of all efforts result in eighty percent of the value created.

Therefore, it is sensible to concentrate more resources in the optimization of the efforts needed to yield eighty percent of the value. In the case of the supermarket, there is a need to identify the goods of top value in the inventory and to concentrate on the application of inventory management techniques to them.

RFID Improve Visibility

The Radio Frequency Identification (RFID) tags can also help to improve inventory management. The main advantage of RFID tags is that they do not need line-of-sight visibility in the same manner as the barcode readers to function.

RFID readers rely on radio frequencies, which require a receiver, and not an optical scanner. High frequency RFID readers are useful for tracking goods in transit. This can help with external bottlenecks. Within the supermarket, the use of RFID tags will help to track any products within the warehouse. This will help to eliminate problems of excessive inventory, and lack of inventory visibility.

ECR and CPFR

The supermarket can also improve its supply chain management efforts with the use of Efficient Customer Response (ECR) and by the use of Collaborative Planning, Forecasting, and Replenishment (CPFR). These two approaches came about as retailers realized that they could improve their bottom lines by working in collaboration with all the parties in the supply chain.

These approaches were the result of the realization that what happened in the supply chain affected the ability of retailers to offer good services to the customers competitively. The supermarket already utilizes a bit of ECR and CPFR. The use of ECR and CPFR can improve the problems of excessive inventory and stock-outs.

DCMS and WMS

The supermarket can also improve its inventory management system by installing a Distribution Center Management Systems (DCMS) and a Warehouse Management System (WMS). A DCMS is very important for managing inbound and outbound inventory while a WMS helps to manage the inventory in the store. The supermarket moves a large quantity of inventory every day.

Therefore, any lapse in the inbound and outbound inventory can result in the twin problem of stock-outs and excess inventory. The warehouse works as a bin holding the inventory. If no way of tracking the goods that went to the bin exists, then stock can be lost in the system.

Drop Shipping and Order Cycle

Two more options available for improving inventory management at the supermarket include drop shipping for large purchases, and the review of order cycles to ensure that the cycles conform to the most efficient models for the supermarket’s operations. Drop shipping can help the supermarket to reduce the quantity of inventory it handles by routing large orders directly to consumers.

This can work for consumers who buy large quantities of products and those who buy large items such as large household furniture. The supermarket can organize for their delivery straight to the customer thereby elimination the cost of warehousing and the cost of inventory management. In addition, the documentation on demand and supply patterns can help to develop a realistic order cycle for all groups of products.

Conclusions

There are many potential solutions to the current problems facing the inventory management efforts in use in the supermarket. The supermarket already has some of these systems installed. The existence of these problems means that there is need to optimize the application of the inventory management systems.

The supermarket can eliminate most of the inventory management problems by using a combination of methods such as the ABC analysis and RFID systems.

The supermarket can also benefit from the use WMS and DCMS systems to ensure that no stock goes bad because of lack of visibility. It is impossible to eliminate all inventory related problems. However, the application of the inventory management methods discussed above have the potential of reducing the impact of these problems.

Reference List

Kopezak, L & Lee, H 1994, ‘Coordinated Product and Supply Chain Design’, Case Study, pp. 331-404.

Leeman, JJA 2010, Supply Chain Management: Fast, Flexible Supply Chains in Manufacturing and Retailing, Books on Demand, Dusseldorf.

Meredeth, JR & Mantel, SJ 2011, Project Management: A Managerial Approach, 8th edn, John Wiley and Sons, Hoboken, NJ.

Porter, ME 1980, Competitive Advantage: Techniques for Analyzing Industries and Competitors, Simon and Schuster, New York, NY.

Walker, DM, Walker, TD & Schmitz, JT 2003, Doing Business Internationally: The Guide to Cross-Cultural Success, McGraw-Hill Professional, New York, NY.

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IvyPanda. 2019. "Inventory Management." May 31, 2019. https://ivypanda.com/essays/inventory-management/.

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