Inventory, Supply Chain and Logistics in Retail
What this domain tests
This domain tests inventory types and costs, EOQ and reorder point, ABC analysis, and supply-chain concepts such as the bullwhip effect, cross-docking, 3PL and reverse logistics.
Core rules and concepts
- Inventory types: raw material, work-in-progress, finished goods, plus safety stock (buffer against demand and lead-time variability) and cycle stock.
- Inventory costs: ordering cost, carrying (holding) cost, and stockout cost. Holding cost typically covers capital, storage, insurance, obsolescence and shrinkage.
- EOQ balances ordering and carrying costs: EOQ = √(2DS ÷ H), where D is annual demand, S is ordering cost per order, H is holding cost per unit per year.
- Reorder point = average daily demand × lead time in days + safety stock.
- ABC analysis ranks SKUs by annual consumption value: A items are few but high-value (tight control), C items are many but low-value (loose control).
- Supply chain concepts: push versus pull; bullwhip effect (small demand swings amplify up the chain); cross-docking; vendor-managed inventory; 3PL and 4PL providers; cold chain; reverse logistics for returns; dark stores as urban fulfilment nodes.
Worked example
A retailer sells 120 units a day of a detergent; supplier lead time is 5 days and the store keeps 2 days of safety stock. Reorder point = (120 × 5) + (120 × 2) = 600 + 240 = 840 units, so an order is triggered when stock hits 840. For EOQ, if annual demand is 43,800 units, ordering cost ₹500 per order and holding cost ₹30 per unit per year: EOQ = √(2 × 43,800 × 500 ÷ 30) = √(1,460,000) ≈ 1,208 units. Reasoning: the reorder point protects service during lead time; EOQ minimises total ordering plus carrying cost, not purchase cost.
Traps that cost marks
- Omitting safety stock from the reorder point formula.
- Inverting ABC: A items are high-value and few, not the bulk of SKUs.
- Calling cross-docking a storage technique; it avoids storage by moving goods from receiving to dispatch.
- Ignoring reverse logistics when listing supply-chain flows.