Literature Review Inventory management: Inventory management can be briefly described as: Acquiring an adequate supply and assortment

t of merchandise from which customers can buy. Providing safety stocks to meet unexpected demand or delays in inventory replenishment. Maintaining clear, correct, and current records. Purchasing the proper assortment of goods in quantities that will maintain inventory levels consistent with business requirements, while providing adequate safety stocks. Reducing excessive inventories promptly, so that the dollars realized from clearing overstocks can be invested in merchandise with a greater market potential.

Inventory investment control is accomplished in two ways: Prompt elimination of overstocked items. Inventory replenishment in anticipation of customer demand. Whenever a particular item is overstocked, the overstock should be reduced as promptly as possible. Naturally, the most effective and profitable way is to sell it to customers, even at a discount. However, there are other possibilities. There may be a wholesale market available for certain kinds of inventory. Excessive consumer goods inventories are often sold to "bargain basements" or warehouse outlets. Perhaps you can even arrange wholesale sales to a competitor. Frequently, it is wiser to scrap inventory that shows no sales activity for an extended period of time. In this way, you reduce a misleading overstatement of inventory on your company's books. At the same time, you make space available for inventory that can be sold at a profit. The key to successful inventory management is adherence to procedures for inventory replenishment. Your ability to anticipate customer demand for certain items will help you plan your inventory purchases so that sufficient stocks are on hand to accommodate sales volume without excesses that cause other problems. Planning your purchases will also help you avoid shortages that can only be filled through forfeiture of discounts or absorption of premium shipping charges. Determining purchasing requirements involves answering two questions: What to buy?

 How much to buy? Both questions can be answered by establishing an inventory target for any item you carry expressed as so many days', weeks', or months' sales Brent D. Williams and Travis Tokar, (2008) in their study A review of inventory management research in major logistics journals: Themes and future directions", discussed that logistics researchers have focused considerable attention on integrating traditional logistics decisions, such as transportation and warehousing, with inventory management decisions, using traditional inventory control models. Logistics researchers have more recently focused on examining inventory management through collaborative models. C. Clifford Defee, Brent Williams, Wesley S. Randall, Rodney Thomas, (2010) in their research paper "An inventory of theory in logistics and SCM research", analysed the theoretical categories and presented to explain the type and frequency of theory usage. They concluded that over 180 specific theories were found within the sampled articles. Theories grouped under the competitive and microeconomics categories made up over 40 per cent of the theoretical incidences. This does not imply all articles utilize theory. The research found that theory was explicitly used in approximately 53 per cent of the sampled articles. Vikram Tiwari, Srinagesh Gavirneni, (2007) in their articleASP, The Art and Science of Practice: Recoupling Inventory Control Research and Practice: Guidelines for Achieving Synergy focused on the widening disconnect between inventory-control research and practice, people debate the value of incremental theory building. While practitioners make decisions in a complex and uncoordinated environment, researchers often adopt a simplistic environment for the sake of rigorous analysis. The stakeholders mismatched objectives and motivations may cause this lack of synergy. Controlling and reducing this disconnect would benefit both practitioners and researchers. The existing empirical analysis of companies business improvements based on academic inventory-management theories is inconclusive. Even so, some businesses have successfully implemented inventory theory; however, in most cases, they have greatly modified the inventory models developed by academics. Richard Pibernik, (2004) in his study Advanced available-to-promise: Classification, selected methods and requirements for operations and inventory management gives the theoretical framework for the development of models and algorithms supporting order quantity and due date quoting. At first, alternative generic AATP systems will be identified on the basis of relevant classification criteria. Based

upon this classification, the AATP planning mechanisms will be detailed for two generic AATP types. On the basis of the introduced AATP types and the description of selected models we finally derive requirements, which operations and inventory management have to meet in order to ensure a successful application of AATP. B.J. Grablowsky, (2005) in his paper Financial management of inventory surveyed small business inventory management practices and compared with techniques commonly employed by large corporations. It appears that smaller firms rely on simple controls. Large businesses rely more on quantitative techniques, such as EOQ and linear programming, to provide additional information for decision-making, while small firms are more likely to use management judgment without the quantitative back-up. Of those small firms which did not use quantitative methods for determining inventory order and stock levels, the most common qualitative methods were "past experience" and "executive judgment,". S. M. Disney and D. R. Towill (2003) in their research The effect of vendor managed inventory (VMI) dynamics on the Bullwhip Effect in supply chain compares the expected performance of a vendor managed inventory (VMI) supply chain with a traditional serially linked supply chain. The emphasis of this investigation is the impact these two alternative structures have on the Bullwhip Effect generated in the supply chain. We pay particular attention to the manufacturer's production ordering activities via a simulation model based on difference equations. VMI is thereby shown to be significantly better at responding to volatile changes in demand such as those due to discounted ordering or price variations. Inventory recovery as measured by the integral of timeabsolute error performance metric is also substantially improved via VMI. Noise bandwidth, that is a measure of capacity requirements, is then used to estimate the order rate variance in response to random customer demand. Finally, the paper simulates the VMI and traditional supply chain response to a representative retail sales pattern. The results are in accordance with rich picture performance predictions made from deterministic inputs. Julius A. Sharma, Dinesh K. Sharma, Hari P (2004) discussed Supply Chain (SC), which involves the configuration, coordination, and improvement of sequentially related set of operations in establishments, integrates technology and human resource capacity for optimal management of operations to reduce inventory requirements and provide support to enterprises in pursuance of a competitive advantage in the marketplace. This paper addresses the structures of

supply chain management (SCM) and the activities involved in SCM decisions that help promote profound improvement in efficiency and effectiveness in business operations. In broader context, the paper examines the types of activities involved in SCM ` decisions; the dynamics of the traditional SCM, the complementarities of technology in achieving effective management of operations through enablers of electronic data interchange (EDI) and quick response (QR) disciplines to implement Just-in-Time (JIT) management techniques; and integrated SC and inventory control as it relates to capacity imbalances and transaction costs. Netessine and Roumiantsev analyzed data from 722 public companies representing eight industries: oil and gas, consumer electronics, wholesale, retail, machinery, computer hardware, food and beverages, and chemicals. "We use quarterly data containing 44 time points between 1992 and 2002 for every company in our sample," the researchers write. No service businesses were included in the sample, since inventories are less relevant for such companies. They also excluded conglomerates, like General Electric, in which operations were too diverse to break down. On average, companies in the sample held $396 million of inventory and had quarterly sales revenues of $572 million. "We first tried to find out what explains how much inventory a company holds," says Netessine. "Why does this company have this amount and that company a different amount, even when they are in the same industry?" The biggest determinants of inventory levels were average demand, the uncertainty of demand, lead times and cost of capital. "If you are sourcing from Asia, you should have more inventory," says Netessine. "If capital is more expensive, you should have less. All of these factors together explain how much inventory a company holds." Then Netessine and Roumiantsev looked at how quickly a company adjusted its level of inventory in response to changes in the environment. To establish a company's inventory responsiveness -- called "elasticity" of inventory -- they measured the speed of change in inventory with respect to lead time, sales, sales uncertainty and gross margin. "Then we looked at changes in those factors from quarter to quarter and how inventory changes from quarter to quarter," says Netessine. "Elasticity, for example, measures a change in inventory associated with a 1% change in demand. It shows how quickly a company can adjust inventory relative to other environmental variables."

Finally, they looked at the impact of inventory management on a company's return on assets (ROA), as a measure of financial performance. The results: "Companies that react faster (have greater elasticity) to sales, demand uncertainty and lead time by adjusting inventories do, on average, have higher ROA." This was true not only for current ROA but also for future ROA, projected out three and six months. Results of specific industries showed more variation. For instance, the ability to source faster had a stronger impact on ROA in the retailing and electronics segments. Not surprisingly, the study also found that companies in industries where demand is less certain on average are less profitable. "We suggest that more detailed segment-specific analysis be performed on a less aggregated data sample to study specific industries," the authors write.

Current Retail Strategies

Current small business literature details many approaches and strategies for retail management. Public researchers have conducted studies to gauge the effectiveness and efficiency of different processes in order to streamline small business operations. Analyzing how this research was conducted is useful not only in contributing to our existing knowledge, but also as a model for conducting primary research. One of the main areas of focus for our research is inventory control. An ideal system is inexpensive, flexible and efficient. It should automate some processes and thus require less employee involvement. Holding costs, which result from keeping too much inventory on hand or keeping it for too long, are minimized through effective inventory control. Thus, cash is available for investment in other aspects of operation. Efficient recordkeeping and inventory control also improve demand forecasting which results in fewer stockouts or extra inventory on hand (Mazhar, 2008). Internally, inventory data needs to be well organized and readily accessible to help employees with making educated decisions that would eliminate human error. Database software and management of the information will also prove crucial to improving operational efficiency. The methods that help achieve these goals are an important focus of further research for our team. Quick response is a strategy of continuous replenishment to achieve right-sizing of inventory. It parallels just-in-time inventory management, which is a system of ordering items for a store as the need arises, rather than preparing heavily in advance of a need. Both processes are used by business owners to effectively manage their inventory and

avoid wasted time and resources. Many small and medium-sized enterprises (SMEs) are hesitant to adopt new strategies in their businesses since most are family owned and operated. Adopting new strategies can create conflict due to differences in attitudes between generations. However, certain sectors are more likely to adopt new technology. While businesses that do not adopt new technology claim they do not want to lose their competitive edge, the benefits that other SMEs observe included improved customer services, communication, speed, and efficiency (Wagner, Fillis, and Johansson 2003). Proposition 2: SMEs tend to resist implementation of new technologies.

A Proxy for Quality A possible outcome of the study is that it could help investors better predict the financial performance of companies. "Due to limited understanding of the connection between inventory management and financial performance, few analysts and fund managers use inventories to predict/explain superior accounting returns," the report states. However, authors note one exception -- David Berman, a hedge fund manager in the retailing sector who, by paying particular attention to the "joint dynamics of inventory and sales," achieved remarkable performance for his portfolio. (His methodology is described in a recent Harvard Business School case study called "David Berman".) Roumiantsev, however, stresses that inventory elasticity alone can't explain stock performance, and "more research is needed to link [them]." A more obvious and important outcome of the study is that it provides a way to measure a company's ability to manage inventory. Looking at companies' "inventory elasticity," the report concludes, is a more relevant measure of operational excellence than simply looking at inventory levels. Indeed, it is common practice for companies to manipulate inventory levels by delaying acceptance of shipments or offering discounts to temporarily decrease inventory levels. "We would like to suggest that it is harder to manipulate inventory elasticities that may provide a fuller picture of the situation," reports Netessine. "By analyzing a firm's response to the environment in terms of inventory adjustments, boards of directors might be able to better evaluate the management of a company."

This is something that Wal-Mart already has recognized. "Wal-Mart is clearly looking at how inventory tracks sales," says Netessine. In fact, in its 2004 annual report, the company notes, "Inventory growth at a rate less than half of sales growth is a key measure of our efficiency." According to [5], the retail industry faces stockout rates of 5-10% which results in sales losses of up to 4% corresponding to hundreds of millions of dollars for large retailers. The most significant cause for stockout situations has been attributed to inefficiencies in in-store logistics due to the lack of inventory visibility. The paper presents a product availability monitoring system which anticipates stockouts before they occur and triggers the personnel to replenish the shelf. According to [6], retailers of products with limited shelf life are faced with the dilemma of stocking the right mix of standard product and its customized stock keeping units, in each product category and the paper models the retailer multi-item inventory problem with demand cannibalization and substitution. Reference [7] has proposed a generic modeling framework to address a number of issues, including stock outs, which continues and extends a recent stream of research aimed at integrating insights from modern inventory theory into the supply chain network design domain.

A very important decision during the designing phase of a retail chain is to fulfill the client service target with the total minimum cost as a trade-off between inventory management policies for each shop and delivery policies from the central warehouse. This problem has been analyzed and modeled in [8] and it has been found that in some instances, total costs can be reduced while increasing customer responsiveness.

J.C. Penney has become a successful retailer due to its supply chain infrastructure, which includes the teams of people, the quality laboratories, the transportation providers and technologies that work in tandem with internal and external sources worldwide to get its products to the market [9]. In [10], reinforcement learning (RL) techniques have been used to determine dynamic prices in an electronic monopolistic retail market. The market has been considered to consist of two natural segments of customers, captives and shoppers. Under certain logical assumptions about the arrival process of customers, inventory replenishment policy, and

replenishment lead time distribution, the system becomes a Markov decision process thus enabling the use of a wide spectrum of learning algorithms. This model and methodology can be used to compute optimal reorder quantity and optimal reorder point for the inventory policy followed by the seller and to compute the optimal volume discounts to be offered to the shoppers. The paper of [11] addresses a periodic-review pricing and inventory control problem for a retailer which faces stochastic price-sensitive demand. Any unsatisfied demand is lost, and any leftover inventory at the end of the finite selling horizon has a salvage value. Shortage cost has been taken into account along with other relevant costs. Both variable and fixed ordering costs have been considered. With an objective to maximize discounted expected profit over the selling horizon by dynamically deciding on the optimal pricing and replenishment policy for each period, it was found that under a mild assumption on the additive demand function, at the beginning of each period, an (s, S) policy is optimal for replenishment, and the value of the optimal price depends on the inventory level after the replenishment decision has been done. Stocking large quantities of inventory may stimulate demand in many retail sales along with the improvement in service levels. For products having demand rates that increase with inventory levels, [12] analyzes the effect of stocking decisions on firm profitability to develop managerial insights regarding the structure of the optimal inventory policy, and to understand how this policy differs from traditional approaches. Reference [13] develops a conceptual framework that relates information-integration initiatives to the profitability of manufacturer. The framework allows such initiatives to impact inventory management and revenue enhancing measures that, in turn, increase manufacturer profit margins, or affect profit margins directly. Many large retailers also manufacture many of their products. Hence, such manufacturer-cum-retailers will find this framework useful. Reference [14] develops an optimal replenishment policy for items with inventory-leveldependent demand and fixed lifetime under the LIFO (last-in-first-out) policy. Another example of manufacturer-cum-retailer is MelCo, a large company that manufactures tools and fastening systems and distributes over 3000 products to the construction, mining, and hardware industries in several countries. Reengineering of the stock replenishment system at MelCo has been described in

[15]. A central warehouse located in Melbourne supplies a retail network of nearly 30 branch service stores in Australia. Unsatisfactory inventory control was resulting in inaccurate and inappropriate stock levels that inhibited stock distribution and resulted in excess inventory. MelCo developed a system where inventory description, planning, and distribution are directly linked in a network that covers all the branches. Reference [16] makes an attempt to coordinate supply chain when demand is shelf-space dependent. The paper considers a manufacturer or wholesaler who supplies some item to retailers facing demand rates depending on the shelf or display space that is devoted to that product by a retailer and its competitors. The work in [17] develops efficient algorithms to determine optimal pricing and replenishment strategies for integrated supplier and retailer as well as independent supplier and retailer. The research in [18] considers the problem of determining (for a short lifecycle) retail product replenishment order quantities that minimize the cost of lost sales, back orders, and obsolete inventory. The problem has been modeled as a two-stage stochastic dynamic program. A heuristic has been proposed and conditions have been established under which the heuristic finds an optimal solution. In many cases, consumer demand for a specific product depends on price as well as the in-store stock of the product. Reference [19] studies an optimal control problem of pricing and inventory replenishment in a system with sequential inventories when consumer demand depends on the in-store inventory level. Reference [20] develops a decision support system (DSS) for military clothing retailers that determines appropriate inventory levels. These recommended inventory levels varies from week to week because the forecast demand varies. The DSS also determines how much should be ordered when inventories fall below the specified levels. Inventory levels and order quantities are calculated separately for each of the more than 1,000 items typically handled at a retail site. A simulation model has been developed for balanced inventory flow replenishment in clothing ordering and distribution [21]. Initial investigation with the simulation model in [21] has confirmed that a steady flow of orders allows retail sites to maintain low inventories with little risk of stock outage, while the manufacturer enjoys a steady, predictable production load that reduces manufacturing cost.

The paper in [22] evaluates the performance of a multiitem joint replenishment inventory model assuming that the customer who cannot be satisfied by the retailer will be lost. In [23], an analytical model for coordinating inventory and transportation decisions in vendormanaged inventory (VMI) systems has been developed. Reference [24] generalizes the inventory-leveldependent demand inventory model to explicitly model the demand rate as a function of the displayed inventory level and then investigates the product assortment and shelf-space allocation problems by extending this model into the multiitem, constrained environment. Reference [25] gives a model for managing multi-item retail inventory systems with demand substitution where customers for retail merchandise are often satisfied with one of several items. The paper in [26] considers the problem of optimizing assortments in a multi-item retail inventory system. In addition to the usual holding and stock-out costs, there is a fixed cost for including any item in the assortment. Assortment planning at a retailer entails both selecting the set of products to be carried and setting inventory levels for each product. Reference [27] studies an assortment planning model in which consumers might accept substitutes when their favorite product is unavailable. It develops an algorithmic process to help retailers compute the best assortment for each store. Reference [28] considers a retail inventory system in which customer orders arrive at random and each order specifies a list of items. Although customers accept later dispatch of an item, there is a cost advantage in having items available for immediate dispatch. Time-weighted holding and shortage costs are incurred for each item. Using a base stock system and with an objective to find the item base stocks that jointly minimize the total cost of the system, the stock of each item is controlled. The Risks of Being Just-In-Time Nick Koletic, an economics specialist at UCLA. In addition to giving a brief background on Just-In-Time inventory systems benefits, the articles main focus is the risks that JIT systems face. Just-In-Time inventory (JIT) is part of a production system whereby a firm vastly reduces inventory from its production processes so that utilization of production inputs and delivery of finished products are accomplished without incurring significant holding costs. While JIT

inventory systems are quite attractive for this reason, they are a double-edged sword. And though

a JIT system might even be a necessity given the inventory demands of certain business types, its many advantages are realized only when some significant risks to healthy inventory management are mitigated. JIT systems have several cost-cutting advantages. As Charles mentioned in his Dell Computer case study, JIT inventory systems, a financial imperative for Dell, can radically reduce holding costs. In the case of Dell Computers, this meant that the fewer finished computers Dell holds in inventory, the less money they lose per computer as they rot on a shelf. In addition to these significant cuts in depreciation costs, which for Dell can be up to 1 percent per computer per week, JIT inventory can also cut storage costs. One can imagine how Toyota, a pioneer of JIT systems, might save on storage costs as their finished computers and cars no longer sit idle in warehouses awaiting customers. And these storage cost savings apply not only to these finished goods, but also to parts that Toyota might use as inputs in production. These inventories are kept at a minimum through JIT systems as parts are ordered as needed. JIT systems also cut delivery costs as finished products are shipped to where they are in demand. Shipping the same quantity of a product to different retail outlets, for example, might not make much sense if the demand for that good is significantly greater at one location relative to another. This approach to delivery cost savings also facilitates decreases in aforementioned holding costs by not overstocking certain locations with a product. The same principle holds for inputs in production; parts are not delivered and held at production centers where they might lay idle. Some positive externalities may also result from a firms decision to implement a JIT system. Suppliers of such some positive externalities may also result from a firms decision to implement a JIT system. Suppliers of such a firm, for example, might then be able handle larger orders but fulfill them with smaller shipments. That is to say that for any given order size, supplying a customer that utilizes JIT is typically easier to do because individual shipments tend to be smaller for these customers and thus tend to be less demanding of the supplier. So it might be possible for suppliers, merely by the nature of their customers JIT system, to greatly expand their ability to fill larger orders without having to increase production capacity. Several factors, however, make JIT systems a risky proposition. A key concern here is the extent to which firms are dependent upon particular suppliers under such an inventory system. For example, if a firm were to commission a highly proprietary product to a single supplier (single suppliers being common in JIT), a JIT inventory system would put such a firm at an even higher

risk of rip-off on behalf of the supplier because the firm would have no immediate inventory to buffer an interruption of supply. Such an interruption of supply might be so costly that the firm might just allow the supplier to overcharge the firm up to the cost of this interruption. This ripoff cost might completely cancel out or even exceed the savings that drove a firm to utilize a JIT inventory system in the first place. Even more dangerous are internal issues that might lead single suppliers to be unable to fulfill a firms orders. In this case, the firm has no option but to incur the costs of an interruption of its production input supply. Internal issues might include, say, labor strikes on behalf of the suppliers employees in which labor unions could hold the supplier for ransom up to the amount of its pending orders, again leading to an interruption of the firms supply of production inputs. But internal issues can mean a host of things (and no, I'm not talking about a Webhost) that prevent a firms supplier from supplying. The point is that by facilitating the interconnectedness between businesses, JIT inventory systems increases the risk that problems or failures on one end of the production chain might be felt on another end. However, these risks associated with JIT inventory systems may be ameliorated to a certain extent. Indeed, the evolution of the organization of firms has already taken many of these risks into account, particularly with respect to rip-offs. For example, firms that might otherwise commission highly proprietary products to a handful of suppliers usually either produce these items themselves or in fact own the suppliers that do so in order to prevent price-gouging from occurring. If in-house production or a supplier buy-out is not a feasible option, firms still have other common-sense ways of preventing these risks. A firm might have to really scrutinize the integrity of their suppliers not only in terms of their trustworthiness but also in terms of the health of their business; contracting with a supplier at risk of going out of business makes little business sense in general, but firms with JIT systems are and should be even more acutely aware of these scenarios. Taking it a logical step further, a firm might contract with several suppliers in order to lessen the harm done by any one of them failing to supply. Furthermore, for the riskaverse firm, short-term and non-exclusive contracts with suppliers might also be attractive as they provide both insurance and punishment against a suppliers misbehavior. A supplier

would have less incentive to misbehave and the firm would have more recourse under such an arrangement.

Just-In-Time inventory systems provide for an attractive, cost-cutting production system as long as risks are weighed and mitigated. Preventative measures introduced here are by no means meant to be an exhaustive list of how firms should approach these risks, but rather are suggestions to the preliminary considerations firms should make in implementing a successful Just-In-Time inventory system.