Inventory Management in Retail Industry - Report Example

Definition: An effective inventory management involves the knowledge on the kind of inventory available, where it is being used, and the products that the inventory will produce. Inventory management refers to the process of efficiently, and effectively supervising the consistent flow of units, into and outside an existing inventory. This process normally involves controlling the transfer of units, for purposes of preventing the inventories from becoming very high, or very low, to the extent that the units under consideration would negatively impact on the operations of the business organization, or the company under consideration. A competent inventory management will also try to control the various costs that are associated or related to the inventory. This is from the perspective of the total price of the products, and the tax burden which is produced by the collective value of the inventory under consideration. The retail industry is one of the sectors that usually require an efficient inventory management system. It is impossible for any retail organization to initiate measures aimed at controlling the inventories of the organization. Inventory control is one of the most important activities that a retailing organization can engage in (De, 2006). For example, retailing stores or organizations will increase their profits or sales during holiday seasons, through the process of inventory control. Inventory management in the retail sector is very important during periods of recession, and when the spending of a customer is very low. For majority of small retail organizations, the holiday period is a very important sales period, within their financial year. This can either make or break the business organization. This is mostly because during this period of time, people are engaged in wide scale shopping. The objective of an inventory management, in a retail set up, is to strike a balance, between customer service and inventory investment. This is while minimizing the various costs that the organization will face. For example, when a retailing organization has too much inventory, this may lead to a reduction of the profits that the organization may make. This is because of the high costs associated with the management of the inventories. Inventory management relates to customer service, when the retailing organization releases the products, based on the demands of the products under consideration (Micheli, 2008). Customer service normally entails the satisfaction of the needs and demands of customers. However, poor planning and policy formulation may make it impossible or expensive for the organization to satisfy the various needs of customers. Inventory control is therefore an efficient method that a retailing organization can use, for purposes of ensuring that it meets the various needs and demands of customers (Başar, 2011). Importance of Inventory: Any retailing organization will tell you that their most important assets are the inventories under their control. Raw materials, completely finished, and work in process goods are always considered as part and parcel of a business asset, that the organization would sale. Inventories are a representation of some of the most important and essential assets that a business organization normally possess (Başar, 2011). This is mainly because the turnover of inventory is a representation of one of the main sources of revenues that an organization acquires, leading to a subsequent earning of dividends to the owners or shareholders of the company. Inventories normally amount to 50% of the total costs of capital that a business organization normally incurs. The other 50% of capital invested in a retail business organization goes to administrative and other costs that the business will incur, while carrying out its objectives. Inventories are the major reasons why a business organization exists. Other costs developed, are aimed at ensuring there is a proper management and control of the inventories under consideration. This is the reason why a retailing organization will invest heavily in inventory control (De, 2006). Inventory management helps a retailing organization to control the manner in which it stores and releases the various inventories under its possession. This is because possession of a large volume of inventories, for longer periods of time, is not a good aspect for a retailing business organization. This is because it would increase inventory storage costs, spoilage costs, and it may make these inventories obsolete. Furthermore, possession of a small volume of inventories is not beneficial to a retailing organization. This is because the business organization is at risk of losing a potential market share, or sales of the inventories under consideration (Micheli, 2008). This is because the company would fail to meet the demands of customers, because of a shortage of supplies. This in turn would lead to the failure of a company to tap into a potential market. The inventory management strategies normally help in minimizing inventory costs, and this is because they help an organization to receive or create inventories only at a time when they are needed. An example of a good strategy that makes this possible is the just-in-time inventory management system. However, it is important to understand that the main goal and intention of these inventory management strategies or forecasts is to create a balance between customer service and inventory investment. This is by satisfying the various demands of customers, regarding their needs. Functions of Inventory Management: Inventories are important tools for any business organization to operate efficiently, and almost every business activities involve the delivery of a service or a product, in exchange for a currency. On this basis, inventory management is an essential and important part of the operations of a business organization. Most wholesale and retail organizations normally receive their revenues, by selling inventories, i.e. merchandise. In order for supply and business chains to run efficiently and effectively, they have to meet every requirement necessary to manage their inventories. Some of the major concerns raised in the management of inventories include the costs of ordering the inventories, the level of customer relations, and the carrying inventory. For a company to be profitable and successful, they must have an efficient and effective inventory management system (De, 2006). There are four major functions of an inventory management system in an organization. These functions are, meeting the anticipated demands of a customer, smoothening of the production requirements, decoupling operations, and protecting against stock outs. Meeting the anticipate demand of a customer: This means that the organization will develop and manage an inventory system, based on the various demands of customers. For example, when shipping the products, the company would seek to introduce the products into the market, based on their demands. Take for example Samsung. The company would only ship its mobile products, based on the demands of the mobile phones in their target market. For example, if the demand of the mobile products is 1000 phones, the company may ship these phone products to their target market. Shipping an excess amount would mean that there is a high number of these products, and hence reducing their prices. Having an effective inventory system would minimize the chances of supplying an excess number of inventories to the market (Kurlikova and Tyapuhina, 2013). This would therefore mean that the company would manage to control its supply capabilities, for purposes of meeting the demand of its customers. An inventory record normally highlights the amount of units supplied, the units returned, and the units which have reached the hands of customers (Deshpande, 2012). Through these records, the company will manage to know the demands of its products, and hence, strive to meet these demands. Smoothening the production requirements: Having an effective inventory control system, within a retailing set up, will help in ensuring there is efficiency in the manner in which the various stocks or inventories of an organization are controlled or handled (Svensson, 2001). This is because the organization will have knowledge on the shortages, and the excess inventories that it is possessing. Having this information in a retailing organization is very important, and this is because the retailers can plan on how to meet the demands of their customers during the peak seasons. This is a time when many people are involved or engaged in shopping activities. The peak times or seasons in a retailing industry normally occurs during holidays. Furthermore, an inventory control mechanism will help an organization to reduce the various costs that it would face, because of storage. Poor storage may result to the destruction of the inventories, and this may make the organization to go at a loss (Erevelles and Stevenson, 2006). Proper and good inventory management system will ensure that the inventories are properly stored, hence protecting the company from loss. Decoupling of operations/ Elimination of sources of disruption A proper inventory management system helps to eliminate some sources of disruptions. For example, having an inventory management system would help the management of an organization to plan on how to deliver the inventory units, and also how to overcome the various obstacles that the organization might face while delivering the units under consideration (Micheli, 2008). Through effective planning, the management will succeed in ensuring that the supply of its inventories is able to meet demand, and no disruptions exists, which can negatively impact on the efficiency in the manner which the organization satisfies the various needs of its target market (De, 2006). Furthermore, in eliminating disruptions, inventory managers normally seek to hold their stocks, for purposes of ensuring that there is enough stock to meet and satisfy the demands of customers during the periods of shortages. Protection against stock outs. An inventory control management system helps in protecting the retailing organization against stock outs. Stock outs refers to a situation whereby the organization has unlimited stock, hence it cannot carter for the needs and demands of its customers. A proper inventory management system will help an organization to know the volume of stocks within its warehouses, and the demand needed for these stocks (De, 2006). It is by basing on this information that the management may decide on whether to increase its stock, and retain the existent stock, for purposes of releasing it to the market. As noted earlier, failure to have enough stocks or inventories may result to the inability of the retailing organization to meet the demands of its customers (Svensson, 2001). This is very detrimental to the organization, because it would lead to losses, and it would make the organization to loss a certain percentage of its market share. This is because the customers of the retailing organization would seek to shop at the competitors of the organization. Approaches to Inventory Management: There are three main factors to consider, when it comes to inventory management. These factors are pricing, seasonal demands, and assortment of goods and services. Every inventory manager is concerned with the cost of shipping, and holding the inventories. An inventory manager would seek to minimize these costs, for purposes of making or acquiring profits (Erevelles and Stevenson, 2006). Furthermore, when the organization manages to minimize costs, then it can pursue the cost leadership strategy. This is because its gains the capability of producing its services at a cheaper price, when compared to its competitors. Pricing While undertaking an inventory management, there are a number of pricing issues that the manager should consider. One important aspect is the labor cost. An inventory manager cannot work by himself, and hence he or she will need to hire people to help in managing the inventories of the organization (Crow and Singh, 2009). This is one of the fixed costs of the management. This is because the company cannot do without these employees. Furthermore, because of the importance of the inventory department, there is a need of hiring highly qualified workers or employees. This includes sales men and women, who have the capability of forecasting the demands of the various inventories that the company holds, or possesses (Heydari, 2012). Paying these people well, is a motivating factor, and will ensure that they are effective in whatever they do. On the other hand, failure to pay them well can be a de-motivator (Carmignani, 2009). This means that the employees of the organization may not be efficient in the manner in which they carry out their duties. Furthermore, the organization may experience a high labor turnover, and this is not beneficial to the company (Tracey, Lim and Vonderembse, 2005). Take for example a company such as Wal-Mart. Wal-Mart is known for paying its employees, a very small amount of money. As a result, the company normally experiences a high labor turnover (Svensson, 2001). This is very expensive to the company, mainly because it will have to engage in the process of hiring other people, to fill in the vacant places left. The company would also lose experienced workforce, who are efficient and effective in the manner in which they are handling their duties or programs (Iii and Mccormack, 2004). Seasonal Demands Another important factor to consider while managing inventories is seasonal demands. Some products are only demanded during certain seasons, and hence the inventory manager has to have such kind of knowledge (Piranfar, 2009). Without this type of knowledge, the inventory manager would not know the time of releasing and holding of stocks (America, 2013). Furthermore, without this kind of knowledge, chances are high that the company may not have the capability of satisfying the various needs of customers. Based on these facts, it is essential and important for a company to know the seasonal demands of their products. This would ensure that they are able to develop policies that can carter for the needs of its customers (Nilsson, 2006). Assortment of goods Another important factor to consider is the assortment of goods. An inventory manager has to be aware on how to store and keep the inventories under their possession (Klaus, 2010). Assortment of goods or products refers to the activities that a retailing organization engages in, for purposes of collecting services or goods with the intention of satisfying the various needs of their customers. The major factors that a retailing organization should consider while assorting goods or products are (Attaran and Attaran, 2007), a. The number or volume of the products under consideration. b. The number or breath of the product lines. c. The number or depth of the product varieties that exists within a product line. d. The manner in which products are relating with each other in the retailing environment. By observing these elements, chances are high that the retailing organization will manage to effectively manage and control the incoming and outgoing stocks of the company. Techniques of Selecting Inventories: There are a variety of methods that an organization can use in classifying, selecting and storing its inventories (Piranfar, 2009). One of the most common methods is the ABC analysis. The ABC is a business term that defines the inventory categorization techniques. A is a letter that denotes a very tight control measure, and keeping of accurate records (Klaus, 2010). This term is normally used for important inventories or products of the company. These are products that require efficiency in the manner in which they are stored. B is a letter that stands for a less controlled product, with good records kept. Inventories labeled as B, are not as important and delicate as inventories labeled as A (Lynch and Whicker, 2008). Products that are abbreviated as Letter C stand for simple controls, and minimal records. These are products that are not very important, or necessary for the organization. The ABC method of selecting inventories is normally used by retailing organizations that want to control highly sensitive inventories (Mcadam and Mccormack, 2001). This includes inventories that can easily spoil, when they are not handled with care. Examples include electronics, which can be destroyed through poor handling. The Just In Time Approach is another technique that an organization can use, for purposes of selecting and storing inventories. The JIT strategy is an approach which seeks to improve a return on investments through a reduction of the in-process inventory, and any other associated costs (Svensson, 2001). This approach originated in Japan, and Toyota was the first company to adopt this policy. Because of the adoption of this policy, Toyota was able to increase the rates of its productivity, by eliminating waste. In meeting the objectives of the JIT, this process will rely on signals that exist between different points of production. These signals will tell the inventory manager when to acquire new products, or when to release them (Nilsson, 2006). The HML analysis is also another technique that a retailing organization can use, for purposes of selecting and storing inventories. H stands for High Priced Items, M stands for Medium Priced Items, and L stands for Low Priced Items (De, 2006). This system is widely practiced at the retailing stores or supermarket stores. A company such as Wal-Mart has different sections that hold inventories, based on their prices and quality. The HML analysis is useful because it determines the frequency in which an organization verifies its stock, and it helps at controlling consumption at a departmental level (Lynch and Whicker, 2008). Furthermore, it helps in controlling the purchases of an organization, by classifying stocks, in terms of the most expensive, and the least expensive. Stock reviews on the other hand, involves the procedures and processes that an organization engages in, with the intention of finding out, the volume, type, and nature of inventories under its possession. This helps the organization to initiate policies or plan on how to effectively control the inventories under its possession. Stock review can also be referred to as an inventory management analysis process (Lynch and Whicker, 2008). This is because the management will be involved in analyzing all the stocks or inventories under its control. Store Operations: In a retailing organization, there are three methods that the organization can use to manage inventories in their stores. These methods are FIFO, LIFO, and FEFO. FIFO is a word or concept which means, first in, and first out (Tracey, Lim and Vonderembse, 2005). According to this concept, the inventories of an organization are recorded by beginning with the oldest inventory within the stores, to the latest inventories within the stores (Svensson, 2001). LIFO on the other hand is a concept that stands for, Last in, and First Out. According to this concept, the latest inventories are given priority, over the oldest inventories within the organization. FEFO on the other hand is an inventory storage technique, whereby the organization would dispose off the first products that are expired. This aims at protecting the inventories from damage, arising out of expiry. It is important to explain that these three methods are used for storage purposes (Klaus, 2010). For purposes of operating and tracking inventories within the store, retailing organizations such as Wal-Mart, Target, Lawson have developed an RFID system that is used to track and monitor the stock under consideration. For example, Wal-Mart has consistently used the RFID technology to monitor and track its inventories, which are transported to its various stores (Bae, 2012). In the year 2007, the directors of the company managed to denote that the use of RFID technology, in their management of inventories played a great role in reducing the excess inventories that the company used to face (Lynch and Whicker, 2008). Based on this fact, the RFID technology has helped in slashing the out of stock activities, by a third. Another important technology that is used by retailing organizations in their inventory management is the Internet of Things technology. Companies such as Tesco and John Lewis are known to be using this technology, in their warehouses and stores. Take for example Insta Search, a technological application developed by Tesco (Bae, 2012). This application manages to provide data regarding the customer’s behavior, thus enabling the company to know the kind of inventory to keep, and the ones to release, at certain periods of time. Wal-Mart, Tesco, Sainsbury are also involved in constant and continuous rotation of employees. This is for purposes of preventing fraud, and improving the efficiency in the manner in which its operations are carried out (Bouzayani, 2013). Furthermore, for easy identification of prices, these leading retail organizations constantly tag the prices of their products (Yeung, 2006). This helps customers and workers of the organization to know the various prices of their products. To curtail the organization from shortages, companies such as W al-Mart, Sainsbury and Tesco are always involved in periodic stock taking. This involves a situation whereby the company seeks to replace the stocks that have been picked by customers (Nilsson, 2006). Inventory Management Systems: There are two major types of inventory management systems, namely centralized and decentralized inventory management system. A centralized inventory management system refers to an inventory system whereby a company holds all its stock in a single hub (Yeung, 2006). It is through this hub that the company uses to ship all its inventory or stock to the customers, or its various operational stores. In a centralized inventory management system, one warehouse is used, to store all the items. It also has different sections or departments used for purposes of storing different products of thee organization. However, there are no separate buildings or locations, used for purposes of storing the products under consideration. All inventories are housed or handle by the same employees, and the same method of transportation. Large retail organizations normally use a decentralized inventory management system (Micheli, 2008). This is because it is an easier method of transferring inventories to the customers or their retail stores. Furthermore, a decentralized inventory management system makes it possible for customers to pick their orders, as opposed to these orders being shipped to the premises of the customers (Micheli, 2008). Transportation costs between thee decentralized and centralized inventory management system, is balanced. Furthermore, having a decentralized management system makes it possible for a company or an organization to respond effectively or efficiently in circumstances of emergencies (Bae, 2012). This is because inventories are not stored in one specific area or location. Analysis: Inventory management is a very useful process in a business organization. Through this process, an organization is able to manage the various inventories under their possession. This is beneficial to the company, because it will manage to meet demands, as well as supply the products to its customers when they need it. Furthermore, a good and proper inventory management system ensures that the company is able to control the various costs associated with storing its products. Inventory management is a very popular concept, amongst the various business organizations. Companies such as Toyota, Samsung, etc have developed their own inventory systems that help in regulating the manner in which their products are released in the market. The main advantage of a good and proper inventory management system, is cost reduction, and it also gives the companies, the capability of meeting the various demands of its target customers. Bibliography: America, R. (2013). Economic Development with Limited Supplies of Management. Challenge, 61-71. Attaran, M., & Attaran, S. (2007). 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