Lesson 5: From the Plant to the Store

Lesson Objectives

Upon completion of this unit you should know:

• The relationship between inventory management and sales forecasting.
• The concept of optimal inventory.
• How to calculate optimal inventory.
• The difference between a purchase order and a customer order.
• The difference between "manufacture to inventory" versus "manufacture to order."
• The various means by which to transport finished goods.
• The role of a distribution center or warehouse.

Subject Matter

You probably take for granted that the products you need and want to buy are on the shelves of your grocery store. Having these finished goods available at your supermarket, just in time for you to purchase and use in your home, is not an easy task to manage for a retail store.

Inventory Management

Stores must "inventory" products ahead of sales and "forecast" (or estimate) which products customers will purchase (when and how much) to establish appropriate inventory levels for the various products they carry. What the stores are doing is called inventory management and sales forecasting. Not a simple task, considering that a grocery store carries as many as 30,000 different items, many of which are perishable foods with a very short shelf life. Due to the complexity of managing inventory and forecasting sales, companies are increasingly using computer systems to control their inventory.

In this unit, we will explore a number of issues related to inventory replenishment, distribution and transportation. More specifically, we will see how a retail store such as Safeway figures out its inventory, places an order and transports its goods from the warehouse.

Optimal Inventory

From the perspective of a retail store, the inventory is the stock of tangible goods to be sold at that store. A store is interested in carrying an "optimal" inventory. Various factors come into place when considering what is an ideal inventory level, such as having the necessary products available in the right quantity at the right time, while minimizing the cost of ordering and carrying the goods.

Before calculating a store's optimal inventory, we need to give a simple definition of some basic inventory management terms, such as:

Optimal Inventory (OI)

How much of a product a store should have

(Re) Order Point (OP)

When they should get more

Replenishment Quantity (RQ)

How much they should get

Safety Stock

How much additional inventory they should carry as a buffer for changes in sales, production and lead time.

Optimal inventory can be computed using the following formula:

OI = OP + 1/2 RQ

Where OI = optimal inventory, OP = order point and RQ = replenishment quantity

On the average, all items in the store should be halfway through their replenishment. The goal of any store is to minimize the optimal inventory. Stores can do that by better forecasting their demand (this will lower inventory) and by reducing lead time (this will lower replenishment quantity).

Paths to Ordering

When stores place an order, the finished goods come either directly from the manufacturing plant, or from the store's distribution center or warehouse (which ordered it from a manufacturer). Increasingly, orders are being placed electronically by a computer linking the ordering and supplying parties.

The same "order" means two different things depending on who ships or receives the goods. The entity placing the order (in this case, the store) issues a purchase order, the party supplying the merchandise (in this case, the manufacturing plant or the distribution center) considers it a customer order.

When a plant receives an order from a store, it needs to check whether it has enough inventory to ship, or if it needs to produce or manufacture the products. Real perishable goods with short shelf lives, such as bread and milk, are "manufactured to order." This means that the products are processed after the order is placed. Other products are "manufactured to inventory" or made to stock in a warehouse. For example, ice cream is made at Safeway's ice cream plant then transported to the distribution center and stored in freezers. The ice cream subsequently will be shipped to the Safeway stores when they place a replenishment order.

Transportation

When goods are made to inventory, they are usually stocked in a warehouse or distribution center. Whether they are ordered from the plant or the distribution center, the goods need to be transported to the store. A variety of carriers are used to transport the grocery products to the store: trucks, airplanes, trains and boats. Supermarkets may have their own fleet of trucks to transport goods, and supplements its shipping with common air, land and water carriers. They may also have a state-of-the-art distribution center.

The Distribution Center

As an example, Safeway recently opened a new distribution center in Tracy, California at a cost of $120 million. Statistics alone don't tell the story about this state-of-the-art facility. The size of this new distribution center is "large." It will store dry grocery, general merchandise, perishables and produce destined for shipment to Safeway's Northern California stores. A few comparisons might give you an idea of the size of this warehouse:

• If you took a shopping cart and strolled through the aisles at an average shoppers pace, without stopping, it would take you 15 hours.
• 14,000 different items are stored under one roof the size of 32 football fields.
• 142 receiving dock doors and 125 outgoing shipping dock stations.
• Incoming products are stored in 13 mile or 20.8 km aisles.
• 36 state-of-the-art, fast folding doors allow refrigerated products to move in and out of cold storage with a minimum of temperature fluctuation.
• 26 million cubic feet of cold storage holds 18 million gallons of ice cream, 1 billion hamburger patties and 27 million heads of lettuce.
• 30 rooms serve as banana ripening areas.
• 10 miles or 16 km of four-lane freeway facilitates delivery trucks and trailers.

With these numbers, you must agree, "Large doesn't begin to describe how big it really is!"

Careers

Careers related to inventory management and distribution include people working in the areas of store inventory, order management, distribution, warehousing and transportation.

The following subject matters are essential in dealing with inventory management and distribution: statistics, accounting, customer service, labor relations, inventory management, operations management.

College and university degrees in accounting, distribution management and logistics management lead to careers in inventory management and distribution.

Glossary of Terms

Just-In-TimeJust-In-Time A set of techniques aimed at reducing waste by reducing inventory.

Manufacture To Inventory Manufactured to stock as inventory.

Manufacture To Order Manufactured after order is placed.

Order Point A set inventory level. If the total stock on hand and on order falls to or below that point, action is taken to replenish the stock.

Replenishment Quantity The quantity ordered each time the available stock falls below the order point.

Sales Forecast An estimate of future demand.

Store Inventory The stock of items available for sale at a store.

References

Eugene F. Brigham, Fundamentals of Financial Management. (4th Edition), Chicago, IL: The Dryden Press, 1986.
Apics Dictionary. (7th Edition). Falls Church, VA: APICS The Educational Society for Resource Management, 1992.