Basics of Inventory Management
Inventory Control Workshop Series
The following pages are sampled from the
Inventory Control Workshop
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© APICS, 2003
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Instructor Guide
Basics of Inventory Management
Inventory Control Workshop Series
Real-World Case: Dollar General
Dollar General has more than 5,700 stores located in small, rural markets throughout 27
states. As with most retail stores, the single largest asset at Dollar General is merchandise
in inventory. The store tries to keep more than 3,500 core stockkeeping units (SKUs) on its
shelves to ensure customers get the products they want. For the four-year period ending
in 2000, Dollar General’s average store experienced a 23 percent increase in sales.
During that period, the stores also experienced a 54 percent jump in annual average
cartons shipped per store from 28,000 to 43,000 cartons.
Dollar General decided to make changes in its inventory management system. It wanted
to carry less inventory while maintaining a higher in-stock rate in both the distribution
centers and the stores. The company chose point of sales (POS) systems, handheld units
called personal data terminals (PDTs) for actual inventory management and replenishment,
and a satellite communication system for data processing and providing 24/7 connectivity
between all 5,700 stores and the corporate headquarters.
The results of implementing the new inventory management system were instantaneous.
From 1999 to 2001, there was a $73 million reduction in inventory held in the company's
seven distribution centers and an increase in the number of stockkeepng units available for
automatic store replenishment.
Source: Gentry, Connie Robbins. “The Road to Perpetual Progress.” Chain Store Age, New York.
2000, Vol. 78, Issue 8, (p. 100).
© APICS, 2003
Ask the participants to spend a moment reading this article for
discussion.
For more information on this case, see the following article:
Gentry, Connie Robbins. “The Road to Perpetual Progress.” Chain
Store Age, New York. 2000, Vol. 78, Issue 8, (p. 100).
© APICS, 2003
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Instructor Guide
Basics of Inventory Management
Inventory Control Workshop Series
Types of Inventory
• The stock of any item or resource
used in an organization
– Raw materials
– WorkWork-inin-process
– Maintenance, repair, operating supply
– Finished goods
© APICS, 2003
It is useful to discuss each of these inventory types individually.
Raw materials are vendor-supplied items that have not had any
labor added by the firm receiving the items.
Work-in-process consists of products at various stages of
completion in the production process.
Maintenance, repair, operating supply consists of items needed
to perform the functions of the operation. This may include paper
and pencil products, tools, toiletries, and any other items used on a
daily basis to run a business.
Finished goods are completed products that are still in possession
of the firm but are ready to enter the distribution channel.
© APICS, 2003
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Instructor Guide
Basics of Inventory Management
Inventory Control Workshop Series
How Much to Order
Annual Costs
Total Cost Curve
Holding Cost Curve
Order/Setup Cost Curve
Optimal Order
Quantity
Order Quantity
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You may want to take time to discuss this chart. First, the axis charts
annual inventory cost (y-axis) to the order quantity (x-axis). Holding
costs increase linearly with the order quantity. Consider that the
more you order the more you must store, so the higher your costs are
for carrying all of that inventory.
Second, the order or setup costs decrease because the more you
order at any given time, the fewer number of orders you will have to
make. For example, if you need 500 loaves of bread, placing one
order for 500 loaves will cost much less in terms of postage,
shipping, handling, and any other costs than placing 10 orders of 50
loaves.
When you draw the total cost curve as seen above, the minimum of
that total cost occurs where the holding costs are equal to the
order/setup costs. That intersection point is referred to as the optimal
order quantity. In other words, this optimal order quantity is the point
where your inventory systems will have its lowest total cost. The
goal is to calculate that point.
© APICS, 2003
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Instructor Guide