Inventory Management

for
Retail Industry
 Inventory Management in Retail
• Inventory is a term used to describe unsold goods that
can exist in a store, the back room or a warehouse.
• Inventory is the largest components of asset of a retail
unit.
• Sales growth: right inventory at the right place at the
right time
• Faulty practices in inventory control increase the risk
of stock-outs, create lost revenue, and decrease
customer loyalty.
2
 Demand Characteristics in Retail
• Independent and Continuous
• Seasonal in nature.
• Demand can only be estimated over a shorter period
of time as specific product life cycle is shorter.
• Multiple products are often aggregated in a single
order.
• High rate of obsolescence or probability of ‘Mark
down’

3
 In a classical EOQ Model…
• Demand is assumed to be independent and
continuous.
• Annual Demand is assumed to be known with
sufficient accuracy
• Demand is nearly uniformly spread throughout
the year.
• Analysis is done for a single product.

4
Assumptions similar to Classical EOQ Model

• No uncertainty in demand or lead times.

• any replenishment must arrive at beginning of
period.
• No quantity discounts in price
• Costs do not vary with time
• No shortages are allowed

5
Inventory Model with seasonal Demand
Projected
Month Demand Parameter Value:
1 10 Holding Cost: 0.4 per unit/per month
2 62 Set Up Cost: 54
3 12 Stock out: Not allowed
4 130 Lead Time: 0
5 154
6 129 Classical EOQ Solution:
7 88
8 52 Average Demand: 100 unit/month
9 124
10 160 EOQ = √(2*54*100/0.4) ≈ 164
11 238
12 41

6
EOQ Algorithm
Month Projected Demand Order Receipt Inventory Holding Cost Set Up Cost
1 10 164 154 61.6 54
2 62   92 36.8  
3 12   80 32  
4 130 164 114 45.6 54
5 154 164 124 49.6 54
6 129 164 159 63.6 54
7 88   71 28.4  
8 52   19 7.6  
9 124 164 59 23.6 54
10 160 164 63 25.2 54
11 238 328 153 61.2 54
12 41   112 44.8  
Totals 1200     480 378
Total Cost       858
7
 Period Order Quantity (POQ)
• It can be seen the best solution of the problem is such that at
the beginning of the period –
– Either a lot arrive or
– There is inventory remaining from the previous period
The EOQ method does not satisfy this property.
• In a periodic order system, timing of review is fixed, but the
order size varies depending on the expected demand of the next
period.
• The system is suitable when the items of inventory are critical
for business or is of high value.

8
 Period Order Quantity (POQ)
• Divide the EOQ by the average demand to obtain the
average number of periods per order, and round to the
nearest integer (but greater than zero!)
• The EOQ computed earlier is 164. Since the average
• demand is 100/month, this quantity satisfies demand for
an average of 1.64 months, which is then rounded to 2
months.
• A two-months supply is then always ordered. (The
quantity varies as the demand varies.)
9
POQ Algorithm
Month Projected Demand Order Receipt Inventory Holding Cost Set Up Cost
1 10 72 62 24.8 54
2 62   0 0  
3 12 142 130 52 54
4 130   0 0  
5 154 283 129 51.6 54
6 129   0 0  
7 88 140 52 20.8 54
8 52   0 0  
9 124 284 160 64 54
10 160   0 0  
11 238 279 41 16.4 54
12 41   0 0  
Totals 1200     229.6 324
Total Cost       553.6
10
 Part Period Balancing
• Demand can only be estimated over a shorter period of time
because
– specific product life cycle is shorter.
– The acceptability of new design is unknown
• This method is based upon a property of the classical EOQ:
For the optimal Q*,
the annual holding cost = annual ordering cost
• The number of periods covered by the replenishment is
therefore made so that these two costs are as close as possible

11
 Part Period Balancing
Suppose, an enterprise deals with a product for which demand can
be estimated for only 6 weeks. It already has stocks which can
carry the demand for next 2 weeks, for remaining four weeks the
estimated demand are 150, 90, 120 and 120 units respectively.
Unit cost of material is Rs. 62.50; ordering cost Rs. 60 and carrying
cost 20% p.a.
• In such situation EOQ should be calculated based on an iterative
process.
• There can be four alternative buying situation i.e. for 3,4,5 and 6
weeks requirements, ordering and holding cost for all four
situations can be calculated.

12
PPB Algorithm
Holding Ordering
Buying option Order Amount Inventory Cost Cost
3 weeks
requirement 150 0 0 60
4 weeks
requirement 240 90 units for 1week = 21.60 21.6 60
5 weeks 120 units for 2 week + 90
requirement 360 units for 1 week 79.2 60
6 weeks 120 units for 3 week + the
requirement 480 above 165.6 60

•Since, 79.2 is closest to 60, the EOQ can be calculated as 360.

•The EOQ will be calculated separately for the next period
sometime during the second week.
•The EOQ will be different each time.
13
 Aggregating Multiple Products
in a Single Order
• Transportation is a significant contributor to the fixed cost per order
• Can possibly combine shipments of different products from the
same supplier
– same overall fixed cost shared over more than one product
– effective fixed cost is reduced for each product
– lot size for each product can be reduced
• Can also have a single delivery coming from multiple suppliers or a
single truck delivering to multiple retailers
• Aggregating across products, retailers, or suppliers in a single order
allows for a reduction in lot size for individual products because
fixed ordering and transportation costs are now spread across
multiple products, retailers, or suppliers.
14
Thank you
15