Inventory Management, Research Paper Example

Every type of business has some form of inventory. Inventory is a non-liquid asset which is usually used in sales for the turnover of revenue. Examples of inventory may be food items in a grocery store, computers for sale in a tech store, or automobiles being sold by a car dealer. These inventories however, are finished goods. They came from a work-in-process, which started out as raw materials from a manufacturer. Sony may have manufactured many laptop computers, but they are shipped to a retailer to sell to the general consumers. (Sunil Chopra, 2004) Not all inventories are intended for sales revenue though. Businesses may keep inventory of general office equipment used by their employees. Not all inventories are physical either. Customers may be considered inventory while they are waiting in line at a retail store as they represent a sale. There is also virtual or information inventory. A writer may have many enterprise writings on their computer waiting to be published; such documents may be considered information inventory. (Ian Gregory, 2015)

Being low on inventory is never good for business as it causes the loss of revenue and opportunity. In contrast, an overflow of inventory can hurt a business just as bad. Most inventories may eventually become obsolete if not sold or used. Food items can expire, automobile parts can deteriorate, and software programs can become outdated. (Appendix 1) The same is true when customers are considered inventory. If there are not enough employees to work as cashiers at the retail store to check-out a long line of customers, then many customers in the back of the line will get irritated and shop elsewhere. When a writer’s enterprises go unpublished, the information inventory to become obsolete and the time it took to write those enterprises becomes an opportunity cost. For such reasons of obsolescence, inventory management is required to forecast the amount of inventory needed. (Investopedia, 2015)

The amount of inventory needed all depends on what industry a business is in. So, it would be wise for a business to operate in an industry where given inventory is in high demand. The retail industry is constantly in high demand, especially for a reputable company such as Walmart: WMT; NYSE. Walmart is a chain of retail outlets throughout the world that sell basic living and home products. They retail for hundreds of manufacturers of food, utilities, clothing, pharmaceuticals, among various other things. Walmart has been striving for over fifty years because the retail industry is a secure environment for business. (SEC, 2014)

With more than 11,000 operating units in 27 countries, Walmart has demonstrated not only the importance of inventory management, but the success it can lead to for a business. The foundation of Walmart’s success in inventory management traces back to when it was first founded by Sam Walton. Part of the strategic business module was to keep sales prices at the bare minimum. The reason for such a distinct yet innovative strategy was to maintain a cost effective scale to volume ratio. (Appendix 2) Although other competitors in the retail industry had more ample profit margins at the time, Walton knew his sales volume would balance it out. (Mower, 2009)The sales volumes would eventually allow for the economies of scale theorem, giving Walmart a competitive market advantage in the long run. This inventory management strategy enabled Walmart to reinvent the concept of supply chains in the retail industry. (Alliance, 2014)

Another major factor that Walton strategized in his business module was also minimizing operating costs. Even after the groundbreaking success of Walton’s business module, Walmart has maintained the same inventory strategy it started with. The basis of maintaining minimal prices on a grand scale while keeping the operating costs limited proved for a solid method of managing inventory more accurately than any other entity in the retail market. (Rosanna, 2014)Being able to offer sales lower than industry competitors is an effect of such massive sales volumes deriving from a global operation and never ending sources of consumers. Walmart’s ubiquity has allowed the business to obtain a critical market share by being able to sell such a diverse product mix almost anywhere in the world. (Hyde, 2014)

Effective inventory management governs for the most accurate inventory, for inventory management to know exactly what they need and when. Walmart’s supply chain management system utilizes information technology to keep track of their inventory. This is done by tagging all of their products with barcodes using radio frequency identification technology or RFID. Walmart helped pave the way for managing inventory through electronic information, which could then be conveyed to the data base for the inventory managers to analyze. (Millsap, 2012)

An additional strategy that Walmart executed was dealing with their manufacturers directly (Appendix 3). The responsibility of inventory management was directed to the suppliers, a strategy that called for an inventory system managed by the vendors. This relationship with inventory management and vendors made for a more stable processing of inventory and even helped reduce accounting errors. (Malini Natarajarathinam, 2009) As a result of such cost effective processing, the right amount of products was always available to customers. (Waller, 2013)

What makes this electronic information of inventory so unique is the real-time relay of the information. Data is recorded at the point-of-sales and then instantly relayed to the primary inventory data base. This sales information, along with already existing warehouse inventory information, is sent to the suppliers. The suppliers use this information to calculate when more products within the product mix need to be shipped. All of this information is transmitted back and forth between all parties of the supply chain through Walmart’s private satellite system. (Bacheldor, 2008)

Walmart also makes use of a distribution network as part of their supply chain (Appendix This process is done by positioning their distribution centers in close driving range of the retail stores. The transportation trucks under-go a cross-docking process upon arrival at the warehouses. (Soni, 2015) In this process, finished products are taken from the truck coming from the supplier and immediately packed in a store-bound truck. This method is useful because it does not require that the products spend time and take up floor space in the warehouse. This entire process both decreases costs for inventory storage and decreases transportation costs. Another mechanism of this supply chain is how Walmart uses their own truck drivers for transportation of materials. (Morakhia, 2013)

Being the number one supplier-retailer for most of general consumer goods, Walmart holds significant control over nearly every part of the consumer goods industries (Appendix 5). By maintaining to the strategic business module of keeping low prices, Walmart continuously corners their suppliers to reduce their prices. (Kumar, 2014) This pressure to keep cutting prices has led to changes in regards to the manufacture inputs and outputs. In some cases, manufacturing processes have relocated to under-developed countries, particularly China, for cheaper labor costs. (Dozier, 2013)

These operations within Walmart’s inventory management put emphasis on the planning for demand and forecasting for future orders. The forecasts predict the consumer demand for specific products which is based off of historical data, revenue drivers, and fluctuations in industry trends among competitors. Planning for product demands is used to formulate forecasts more accurately, which is a significant factor in effective inventory management. These forecasts are then compared against existing levels of inventory to help assure that the warehouses have the right amount of inventory to satisfy the demand. (Diamond, 2013) The flow of the product mix from the manufacturer, to the retail outlets, and to the final destination of the customer, is the basic function of distribution in the supply chain. Often products undergo batching through the supply chain until they are finally stored on the shelves as finished goods. (Lu, 2014)

Once finished products make it to the shelves at the retail stores, they are divided into five primary strategic merchandising units. According to their 2014 Securities and Exchange Commission (SEC) 10-k filings, Walmart’s international product mix consisted of 56% groceries, 23% fuel, 8% home & apparel, 8% technology, office, & entertainment systems, and 5% of health & wellness, totaling to 100% (Appendix 6).  A total of 151 distribution centers were operated by Walmart in 2014 located throughout the world. Both domestic and imported products were processed through these distribution centers to the retail units. Of the 151 distribution centers operated in 2014, Walmart owned and operated 42 of them, owned 11 of them operated by third parties, leased and operated 62 of them, while 36 were leased and operated by third parties. (SEC, 2014)

Inventories are valued at the lower-of-cost-or-market (LCM), which is computed using the first-in first-out (FIFO) method of accounting. Walmart values inventory at the LCM because markdowns are recorded as reductions of retail value inventory. (Gokarn, 2010) The carrying amount of Walmart’s inventories as of January 31, 2014 is $44,858 million USD (Appendix 4). This does not include any non-current inventory balances, or inventories predicted to remain on hand after one year. (Analysis, 2014)

Despite Walmart’s remarkable inventory management system, even they inevitably suffer losses due to overlooked flaws in the system. In April 2014, executive officers of Walmart came forward about having issues with their inventory managements system. Out of stock merchandise cost the company nearly $3 billion USD in sales, ironically while their inventory increased at a higher rate than sales. (Rosenblum, 2014) The problem was in the RFID system. RFID is read with a proximity scanner. Unlike barcode scanning, RFID is not usually or even required to be seen by the naked eye. This caused it to be overlooked in certain inventory products where RFID was hard to scan through metals and liquids. Currently there is speculation if Walmart should hire more payroll employees in the warehouses to scan barcodes manually to alleviate such inventory errors. (Souza, 2014)

Walmart’s inventory management has minimal impact towards the environment. With distribution centers being closer to the retail outlets, it leaves less of a carbon footprint from truck transportation. As noted in the Bradford MBA manual on inventory management however, the primary impact that inventory has on the environment is obsolescence. If Walmart’s inventory management flaws cause products to go obsolete, then this is not only a cost for them, but a cost on the environment due to the pointless manufacturing of these products. Such materials and energy used to manufacture these products could have been used elsewhere more effectively. (Ian Gregory, 2015)

Because Walmart’s inventory management system allows and even pursues the lowest possible prices for customers, it makes a significant beneficial impact on the social environment. The recent RFID flaws in the inventory management system however, have cost Walmart billions of dollars. (Dudley, 2014) Products were unknowingly stored in warehouses while the shelves were out of stock for customers. This also creates an economic impact on the business. This situation increased inventory holding costs while causing the perception of inadequate customer service by not providing the customers their economic demands. (Handfield, 2013)

Inventory is expensive, and if it is not sold, it becomes a loss due to obsolescence. On the other hand, not having enough of it will drive customers elsewhere where they can get it. The cost of inventory itself is irrelevant, because if it is not sold, it will remain a cost anyways. The relevant factor is the cost of the inventory that is sold or cost of goods sold (COGS). (Salami, 2010)When the inventory or product actually is sold, the cost can then be deducted from the sales revenue to calculate profits (excluding applicable taxes based on jurisdiction). Walmart’s physical inventory being overlooked extends to the inaccuracy of information inventory in their database. Because such valuable information is left out, it leads to decline in customers when they are regarded as inventory. The customers become dis-satisfied with the out of stock merchandise and leave the store, which counts a customer inventory loss. (Gilmore, 2012)

No inventory management system will be one-hundred percent accurate. There are both advantages and disadvantages of financing and holding inventory, including risk factors. There are even other external costs to consider such as management costs and the cost of possible theft. However, in order for a business to be as successful as Walmart, it is imperative to compute inventory requirements as accurately as possible. Walmart’s inventory management system stands as the benchmark and the gold standard for other competitors in the retail industry.  (Woodman, 2014)

References

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