Inventory Proposal Qrb/501

Topics: Inventory, Index, FIFO and LIFO accounting Pages: 5 (1504 words) Published: February 5, 2013
Inventory Proposal - Team A

Inventory Proposal - Team A
Team A has chosen Costco as its company to analyze because each of the team members is familiar with Costco. Costco is a retail wholesaler warehouse that was founded in 1983 in Issaquah, Washington. Costco cuts out the “middle man” by selling its customers items in bulk at low prices. In our study, Costco has a problem with its inventory that needs to be resolved. Team A will be using the Summer Historical Inventory Data provided by University of Phoenix and interpreting the numbers as if it were Costco’s data. Scenarios developed are purely for the educational purposes of Team A’s work. Raw Data|

| | | | | | | |
Month| Year 1| Year 2| Year 3| Year 4| Total| Mean| Index| July| 18000| 45100| 59800| 35500| 158400| 39600| 0.935| Aug| 19800| 46530| 30740| 51250| 148320| 37080| 0.876| Sept| 15700| 22100| 47800| 34400| 120000| 30000| 0.708| Oct| 53600| 41350| 73890| 68000| 236840| 59210| 1.398| Nov| 83200| 46000| 60200| 68100| 257500| 64375| 1.52| Dec| 72900| 41800| 55200| 61100| 231000| 57750| 1.364| Jan| 55200| 39800| 32180| 62300| 189480| 47370| 1.119| Feb| 57350| 64100| 38600| 66500| 226550| 56637.5| 1.337| Mar| 15400| 47600| 25020| 31400| 119420| 29855| 0.705| April| 27700| 43050| 51300| 36500| 158550| 39637.5| 0.936| May| 21400| 39300| 31790| 16800| 109290| 27322.5| 0.645| June| 17100| 10300| 31100| 18900| 77400| 19350| 0.457|

Inventory Management Problem

The problem is two-fold in that Costco has too-narrowly defined its performance measures, and it does not encompass all of the aspects and factors that the company should use to determine its seasonal inventory. In addition the company’s managers have caused Costco to become the victim of the “bullwhip effect.” This means they anticipated heavy demand during one season but were left with an inventory surplus that had to be warehoused or sold at huge discounts after the season had passed (Brinlee, n.d.). Because Costco uses a real-time inventory system called Collaborative Retail Exchange (CRX) (Costco, 2009), it does not have an ordering problem (waiting too long to order stock before it’s sold out). Many of the common inventory management problems have been solved with this innovative system. In the CRX system, inventory is monitored and re-ordered as part of a continuous (perpetual) re-order system (Basu, n.d.). Inventory is managed by the supplier who is notified automatically when inventory levels are nearing or have reached the reorder point. The regular items that Costco orders throughout the year are handled well by the CRX system; the problem lies with the specialty items ordered for the holiday season at the end of the calendar year (Costco quarter two –Costco’s fiscal year begins July 1 so the inventory data shown below will reflect October, November, and December as the second quarter). The seasonality chart below shows high peaks in the fourth quarter, but the season indices (below) tell us that the second quarter actually has the highest index.

Costco’s stockpiling of inventory for the holiday season caused a spike that followed into the next quarter (quarter three) because of high inventory for the holiday without the appropriate demand. This caused a bump in the third quarter, which would normally be a slower time of year before the fourth quarter spring-summer sales begin and the slower summer sales begin. The problem with stockpiling is that inventory can become distressed. According to Jennifer Bosari, “distressed inventory is comprised of those goods or materials that have spoiled, become ruined, or are otherwise impossible to sell on the standard market. It can also be items in good condition that have remained on the shelf too long, taking up valuable resources that could be used towards more profitable merchandise” (Bosari,...

References: Basu, Chirantan, (n.d.) What Are The Two Types Of Inventory Accounting Systems? Demand Media for Houston Chronicle. Retrieved September 9, 2012 from
Bosari, Jessica, (n.d.) What is Distressed Inventory? Retrieved from
Brinlee, Doug (n.d.) Common Inventory Management Problems, Retrieved September 23, 2012 from
Costco & IRI Team (2009) Costco: Inventory Management. Retrieved from (2012), Inventory. Retrieved September 16, 2012 from
Investopedia (n.d.) Definition of ‘Economic Order Quantity – EOQ’. Retrieved from (2012). The advantages and disadvantages of FIFO method. Retrieved September 16, 2012 from {sic}
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