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This week we will be discussing inventory management concepts and current practices. We will address the basic concepts and the concept of Risk Pooling. Risk Pooling is a fancy term, but it really is about concentrating inventory at the DC, and not in each store. That is the concept of stripping inventory from retail stores and warehouse them in distribution centers and continuously replenish the stores. Sometimes we called it Continuous Replenishment. Why? retail space are much more expensive. In southern California, you are looking at tens of dollars or more per sq ft per month versus warehouse space near Ontario of $1 per. That also led to practices such as Cross-Docking, and VMI(Vender-Managed-Inventory). That is what most retailers have gone to in USA. The other option is DSD, Direct-Store-Delivery, which is used some but more popular in Europe and Asia due to the lack of the super retail chains. But with the formation of EU, European retailers are getting bigger and going towards the DC approach like here, their main port is in central Europe, Rotterdam, Netherlands. So lots of new DCs are being built around there, and major highways to get to all parts of Europe.
Also, basic inventory policies such as Echelon inventory, (s,S), (s,Q), will be discussed. Generally you can manage inventory by either of these two methods. (s,S) is the most popular, that is when the retailer has a certain pattern in ordering from suppliers, like every week, every month, etc. So when it is time to order, you check what you have on hand, compare it to S, then order the difference. So S is the order-up-to level. s is teh minimum stock on hand. If you run down to s before it is time to order, you have to execute an emergency order, which is no good because it is much more costly. (s,Q) is you let your inventory run down to s, then you order Q. This way you don’t have a schudule, you only order when you need to. Most of your common stocks are ordered via (s,S), because you would constantly need those products, so you have a pattern in placing orders, just the amount are different each time. I am not sure where we have discussed SKU. But it is worth repeating. SKU is Stock Keeping Unit, that is how products are identified within the computer systems. Think about Arrowhead bottled water. Let’s say you have 6-packs and 12-packs in your store. even though they are both same product, but in your inventory system, they need to be differentiated. So they will get different SKUs. In Walmart, they have to deal with over 100,000 SKUs, but in Costco, they ahve to deal with 4000-5000 or so. So it is a lot more complex with Walmart and others in that sense. Cross-docking: When Walmart first introduced the concept of Continuous Replenishment and move inventory out of retail stores, so DCs are established close to the stores to replenish them. Typically, depending on needs, they would load up the trailers at the DCs, and run those out to the stores at night, a night-shift will unload the trailers and shelf them for the early morning. THat is how they can keep inventory down to the minimum at the stores. But the DCs have to be closeby, within striking distance to do that. That is why in southern California, we have them all over in Ontario(Inland Empire), within hours of most of the stores around. Look at a DC, each day you have suppliers delivering on one side of the DC(receiving docks), then on the other side you have outgoing trailers ready to go to stores(shipping docks). So in theory, if you time it right, those inventory coming in would go out quickly, may be even within hours. In a perfect world, at the end of each day, you would have practically no inventory at the DC left. This type of co-ordination with suppliers and stores lead to Cross-Docking at its best. So if you look at the efficiency in managing inventory at a retail chain, you basically set very minimum stocks at the stores, then the trick is to work with your suppliers to flow the inventory through the DCs to the store as quickly as possible. That will minimize you inventory holding cost for sure. Whoever can do this best will win in the retail world.
VMI: So after the Continuous Replenishment concept has gone on for a while, Walmart figure out that to further streamline, it needed the suppliers to know what Walmart needs are asap. ANd they also realize that the major suppliers are the ones who know their products more so than Walmart. So they wanted to turn over the management of ivnentory of those SKUs to the corresponding suppliers. BUt they couldn’t do that without info about the movement and sales of their own products in the stores. So Walmart too the bold move of creating Retail-Link, an IT systems that will flow POS(Point-Of-Sales) data at their stores directly to the suppliers. SO now suppliers know what level of their products are sold in which store, when and at what price. Those info certainly help the suppliers better understand their products. Then Wlamart turned over the ordering and logistics of those products to the suppliers, fully trusting them. So VMI means the suppliers are actually ordering for Walmart what they think Walmart needs at each store. For Walmart, they set this up for only their major suppliers, those 300-500 of them. ANd of course, they manage their performance in the sense that they know how much profit those SKUs generated. If it is no good, they will change the arrangement.