Question

List the 6 reasons business carry inventory. Briefly explain 2 of these reasons.

Discuss the key challenges and solutions associated with distribution management.

Answer 1

The six reasons for businesses to carry inventory is given as below.

1.To Meet Unexpected Demands

2.To Get Quality Price Discounts

3. To Facilitate Utilisation of Labour and Equipment

4.To Hedge against Price increase of materials

5. To Prevent Any Disruptions in Production.

6.To Avoid Stock Outs and Keep Highest Level of Customer Satisfaction

Two of the above points are explained below in detail.

TO GET QUALITY PRICE DISCOUNTS

The more we buy in bulk quantities, more the discount we get. The suppliers offer these discounts to attract and retain regular buyers. Taking advantage of this lower buying price, we can decrease the total production cost of the finished goods. Extra holding cost of inventory can be justified if discounts are sufficient to offset it.

TO AVOID STOCK OUTS AND KEEP HIGHEST LEVEL OF CUSTOMER SATISFACTION

The most important point why businesses keep inventory is to avoid stock outs. Stock outs will result in unhappy customers and customers may not come back to us again. Keeping stocks will make our business a reliable place for customers as they perceive that they get the product whenever they come to us. This makes the customers happy and they keep coming back to us.

Key Challenges in Distribution Management & Probable Soutions are discussed below.

1.Increased Operational Costs

Distribution Management Typically involves transportation. With increased fuel costs, increased maintenance cost of vehicles, increased labour costs etc.operation costs are going up.

Tie-up with fuel companies in loyalty programs can reduce fuel costs, taking amc with vehicle maintenance companies and having fixed contracts with labours can help in optimising operating costs. Many companies are now experimenting on deliveries through drones as well.

2. Need for Business Process Improvement

Every day business and technology is changing. Constant innovation and adaption to best practises are required to keep up to the changing business environment. For example, if you are running a grocery store, contrary to the practise that customers will come to the store and buy provisions, it is now imperative for us to offer home delivery in the current scenario.

3. Need for improved customer service

Customers want transparency, delivery on time at no extra cost. Unlike earlier times, now customers would want to track their order every now and then. They want to know, if their material is shipped, when it is reaching to next transit location and when is the expected date and time of delivery etc. Any company not having these features will not be much preferred by customers nowdays. Similarly, customers would want home delivery of products without any addtional charge. Gone are thse days when the customers will pay extra for shipping.

4. Government Regulations

Many Government regulations are affecting distribution managment systems. Environment and Traffic rules are the major amongst them. Emission rules are so strict in most of the countries that old diesel vehicles cannot run. Many countries are also adapted to low sulphur content fuels to decrease pollution levels. However, it is increasing the fuel cost as huge investment was required for oil companies at their refineries to produce the better fuel. Also, many cities doesnt allow truckers to enter the city during day time as a control measure to decrease traffic. However, this delays the distribution time as truckers take more time to reach their hubs.