Question

Assume you own a retail shop (either a physical shop or an online market) and need to plan for your inventory. Choose a product and explain the issues and trade-offs involved (both demand and supply sides) in inventory management for that product. Discuss which of the inventory control models you would select to manage your inventory.

Answer 1

Whether you think of a car manufacturer with all sorts of tiered suppliers, or a simple mom and pop shop that sells cakes, all businesses manage inventory daily. The concepts are the same and I think it’s easier to understand them if we view them in a small-scale business and then apply them to a larger, more complex inventory system. With that in mind, I will focus on an online tobacco business, specifically, on pipe tobacco. Pipe tobacco can be sold in tins, cans and in bulk. A good business also provides its own home-made blends.

First, it’s important to understand that selling pipe tobacco is an independent demand business, in other words, the sales can vary depending on trends, seasonal patterns and market conditions. A second layer of complexity to selling pipe tobacco is that the inventory is diverse, and it includes raw materials for making artisan blends, work-in process materials which include partially prepared tobaccos and finished goods in the form of tinned tobaccos from name brand tobacconists. To illustrate the complexity surrounding success in this business, we can look at the recent problems with vaping. Teenage deaths around the country resulted in popular outcry and congress enacted laws that directly affected all tobacco products, not just vaping products. The tobacco use age was raised to 21 and some house resolutions have threatened online sales of tobacco. These changes to legislation affect the market and a mismanaged inventory combines with events like this can result in too much stock and a poor inventory turnover ratio.

To help in managing tobacco inventory, I would use the A, B and C items concept. A type items would be those tobaccos with high purchase rates and those loose tobacco that are hard to find. Syryanlatakia tobacco, for example, has become rare because it is no longer produced. This means that older tins that include this type of tobacco are very sought after. Virginia tobacco, on the other hand is easy to acquire and it can be placed as a C-type resource. In this business, most of the focus should be in high quality and rare tobaccos. Finally, to help in reducing the cost of maintaining inventories, the RFID system would be extremely helpful in managing stock. Additionally, it would help in speeding up locating tobaccos for blending and then categorizing new blends by mixture ratio and age. While creating a great blend requires expertise and a good palate, easily finding, using and restocking inventory can be done more efficiently with a simple RFID system.