Inventory challenges

1. Inventory challenges

Great to see you back! Let’s review what we’ve accomplished so far and what’s in store for us in this chapter.

2. Our analysis so far

We already discovered that quite a lot of our shipments are delayed, but the situation is improving over time. This chapter will dive deeper into one of the most challenging aspects of Supply Chain: inventory management.

3. Supply and demand in a free market economy

Before we dig into it, let’s revisit one of the most important concepts of a free-market economy—the law of supply and demand. Imagine the following scenario: your favorite band is in town, and you rush online to purchase the ticket only to be disappointed that they were sold out in 5 minutes. You probably thought to yourself that you'd even pay a higher price than the original one just to claim your spot!

4. Supply and demand in a free market economy

In this case, the supply (the number of tickets) is limited by the capacity of the concert venue and is not changing, while the demand (so the number of fans who want to see the concert) is huge, much bigger than the venue can hold. The concert organizers realize that and can bump up the prices, knowing the concert will sell out anyway. This is demonstrated on the supply and demand chart. In a free market economy, if the supply remains stable, but the demand increases, the price goes up. This relation between supply, demand, and price is one of the key concepts in Supply Chain Management.

5. Inventory management in retail supply chain

Why is it critical to our Retail Supply Chain? Unfortunately, the real-life economy is not always a perfect free-market economy. That is also applicable to our case. As a retailer, we do not produce goods, so we aren’t in perfect control of the supply. It’s impossible to quickly produce extra goods to respond to a rise in demand. Nor can we freely change the prices in the short term as we’re bound by various agreements: the local laws, the consumer rights, and the contracts with our suppliers.

6. Fine-tuning the inventory

So with supply and price being only partly in our control, we are particularly vulnerable to shifts in demand. On the one hand, when demand (or sales) drops unexpectedly, we face an overstock issue with two major problems: One of them is inventory bloat, so the increasing amount of slowly moving, obsolete, or spoiled inventory. It will ultimately have to be sold at a discount or be written off. Another problem is the extra cost generated by the storage of unnecessary inventory. On the other hand, when we do not anticipate sudden increases in demand, we might end up with understock. The opportunity cost of missing sales is one problem, but so are the delays in orders or order cancellations.

7. Monitoring inventory costs and fulfillment timings

Luckily we are equipped with data! In this chapter, we will work with the so-far unused bits of our data model: the inventory levels and their storage costs, as well as the fulfillment file, which informs us about the average number of days it takes to fulfill the missing stock.

8. Sneak-peak of our visualizations

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9. Let's practice!

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