Inventory Management of the Retail and Wholesale CompaniesMr. Csaba Sólyomsenior lecturer BBS-FCCT Institute of Commerceawarded by the French „l’ Ordre des Palmes Académiques”Budapest, November, 2007.
RWHM-INVENTORY Basics of Inventory Control • The definition of stocks and their role in Commerce • Inventory control has to overcome geographical and time differences of production and consumption, • Aspects of inventory control: • Stocks should be high for satisfying marketing aspects (assortment of goods should be wide and deep) • Stocks should be low to minimize capital needs, • Stocks should be low for minimizing stockholding costs • Grouping of stocks and its possibilities: • On stock size: minimal, maximum, security stocks, • On stock movements: current, incurrent, moving and not moving stocks • On stock ownership: own stock, foreign stock, consignation warehouse
RWHM-INVENTORY Recording and Measuring Inventories Measuring stocks – inventory at date, average inventory • Taking an inventory • Computerized inventory record and control systems • What is the average inventory value, and how to calculate it Methods of calculating the inventory value • Systems using accounting prices – booking price differences between actual purchase price and accounting price of goods, advantages and disadvantages of this tools • Systems using moving average prices • The principle of this system, and the way how it works • Technical requirements to be fulfilled for the successful running of this system – online data processing of purchase invoices, and attached transport and other costs and sales transactions parallel to physical goods turnover,
RWHM-INVENTORY Inventory analysis • ABC analysis of inventory value for articles evaluation • Definition of stockturn frequency and stockturn days: • Calculation of stockturn frequency or stockturn days for article groups or shops, • Overcoming the different pricing in sales value and inventory • Factors influencing the stockturn frequency on the firm level: • The sales value determined by volume and prices • The structure of sales turnover – the share of slow and fast moving articles within the sales, • The implemented inventory control and article reorder policy of the firm => average stock • Advantages, threads and conditions for fast stockturn frequency • Stockholding efficiency= sales value / average inventory value • Stockholding reaction in % =(inventory difference / sales value difference) • Elasticity of inventory =percentage change in inventory / percentage change in net sales
RWHM-INVENTORY Inventory costs • Stockholding costs • Stock handling costs (handling of goods, transport, costs of warehouse operations like commissioning, • Losses in logistic processes • Maintenance costs of warehouses • Warehouse hiring fees, • Administration costs • Stock-out costs • Additional purchase costs because of stock-outs, • Losses because of missing sales turnover
RWHM-INVENTORY Financing Inventories What is inventory financing, and what kind of costs are related to it Possibilities for covering inventory financing problems • Merchandizing firm should contribute financing stocks –> trading firm finance the purchase of goods merchandized, • Co-financing of purchases by the supplier -> up to the terms of payment deadline set by the supplier, manufacturer and/or supplier should finance inventories or contribute to their financing. • Customer co-financing -> some part of delivery value will be paid by the customer in advance -> obligations of trading entreprises putting a certain capital into inventories. Capital investment duties fo merchandizing firms will decrease.
RWHM-INVENTORY Inventory reordering policies • Fixed reorder times with optimized reorder quantity (t, T); -> this system can be applied only if sales are stable, don’t increase or decrease, and the optimal reorder quantity is important, • Fix reorder times with stockpiling to S value (t, S); -> flexibility is given by variable reorder quantity, • Reordering if inventory reach the s level, reorder quantity is fixed and optimized (s, T); -> the variety of s inventory level ensures flexibility of this policy with optimal reorder quantity • Reordering if inventory reach the s level but the reorder quantity is S-s as inventory will be filled up to S (s, S) -> this policy is flexible in time and quantity, and is the most frequently used policy in the praxis
RWHM-INVENTORY Inventory planning • First the average inventory requirement is planned from sales volume, and structure and using the stockturn frequency data from the previous period. This value will be further refined. • On the basis of purchase information the inventory reordering policies will be checked and its parameters modified if necessary. These modifications are necessary if stock-outs occurred too frequently or the inventory level was too high. • We have to calculate the consequences of the modified parameters on: • Average stockturn frequency and average stockturn days, • Using the modified stockturn frequencies the new average inventories will be calculated, • An investigation on necessary capital bounded in inventories should be made
RWHM-INVENTORY Goods inflow Goods sold Cash inflow Average stockturn days Average terms of payment given to customers 0 day A nap B nap C nap Terms of payment given by supplier Average time of cash bounded in inventory (cash cycle) Cash outflow Cash inflow Goods- and Capital-stockturn Relationships
RWHM-INVENTORY Stockturn frequencies and days in the German food retail sector 2004-2005