DriversandCostofInventory

SantiagoGallino– TuckSchoolofBusinessToniMoreno– KelloggSchoolofManagement

July2013– LBS– London,UKJanuary2017

19May2017 2RetailFundamentals

LearningModules

1.Demandforecasting

2.InventoryDecisions

3.AssortmentPlanning

4.PricingDecisions

5.Theomnichannelcustomer

6.Fulfillingomnichanneldemand

7.Omnichanneljourneys

8.Supportinganomnichannel

strategy

19May2017 3RetailFundamentals

M2.2Opening1

• Themainobjectiveofinventorymanagementistosatisfycustomerneedsintermsofproductavailabilityandresponsetime,whileminimizingthetotalmanagementandfinancingcosts.

• Holdinginventoryiscostly.• Reducinginventoriescansavesomeofthosecosts.• However,sometimestherearegoodreasonsforaretailerincreaseinventories:

• Pipeline• Seasonal• Cycle• Safety

19May2017 4RetailFundamentals

M2.2WhyMoreInventory2

• Pipeline:Inventorytobeprocessandtransformed.• Seasonal:Capacityisrigidanddemandisvariable.• Cycle:Efficiencyintheprocess,transportation,etc.Promotions.QuantityDiscounts.Fixedcostsassociatedwiththeorder.

• Safety:DemandUncertainty,InformationUncertainty,SupplyUncertainty

• Thesecondfactorisdemanduncertainty.IfweknewhowmanycustomersaregoingbuyaTVthisweekBestBuycouldjustbuythatamountofTVsandholdnoadditionalinventory.ButwedonotknowhowmanycustomersaregoingtowanttobuythatTVandwedonotwanttolosesales.

• Therecouldbesupplyuncertaintytoo.IfBestBuydoesnotknowiftheymaybeabletogetthatTVfromtheirsupplier,theymaywanttodecidetogetitwhiletheycan

19May2017 5RetailFundamentals

M2.2MaketoStockorMaketoOrder3

• Retailerscandecidetoorderormakeitemsandholdthoseasstock.ThisisusuallyreferredtoasMaketostock.

• Anotheroptionisthataretailerwillorderormakeitemsonlywhenacustomerplacetheorder.ThisisusuallyreferredtoasMaketoOrder.

• Ifyouthinkaboutit.Thefundamentaldifferencebetweenthetwoiswhethertheproductwillwaitforthecustomerorthecustomerwillwaitfortheproduct.

• Differentsituations:• Bridalgown,mealatanexpensiverestaurant.• Regulardress,andaburgeratMcDonalds

19May2017 6RetailFundamentals

M2.2CostofInventory4

• PurchaseCost• Costofplacingan

order• Physicalholdingcost

– Moreexpensivefordownstreamstoresthanfordistributioncenters)

• Financialholdingcost– Costofcapitalr(%/yr)

– Annualopportunitycost

– Productobsolescence• CostofBrakage

Holdingcost

H=annualunitholdingcost

19May2017 7RetailFundamentals

M2.2Closing5

• Inthisvideowehavediscussedthemainreasonsandcostsassociatedwithholdinginventory

• Youshouldbenowabletorecognizesituationsthatpromptretailerstoholdmoreinventory(e.g.,livingfarfromstores)

• Thinkaboutthemaintrade-offsthatyoucanface.• Recognizetheimplicitcostofhavingtolittleinventory

19May2017 8RetailFundamentals