Page 416 - Foundations of Marketing

Marketing Channels and Supply-Chain Management | Chapter 13 383

is to minimize inventory costs while maintaining an adequate supply of goods to satisfy
customers. To achieve this objective, marketers focus on two major issues: when to order and
how much to order.
To determine when to order, a marketer calculates the reorder point: the inventory level
that signals the need to place a new order. To calculate the reorder point, the marketer must
know the order lead time, the usage rate, and the amount of safety stock required. The order
lead time refers to the average time lapse between placing the order and receiving it. The
usage rate is the rate at which a product’s inventory is used or sold during a specifi c time
period. Safety stock is the amount of extra inventory a fi rm keeps to guard against stockouts
resulting from above-average usage rates and/or longer-than-expected lead times. The reorder
point can be calculated using the following formula:

Reorder Point = ( Order Lead Time × Usage Rate ) + Safety Stock
Thus, if order lead time is 10 days, usage rate is 3 units per day, and safety stock is 20 units,
the reorder point is 50 units.
Efficient inventory management with accurate reorder points is crucial for firms that use
a just-in-time (JIT) approach, in which supplies arrive just as they are needed for use in
production or for resale. Companies that use JIT (sometimes referred to as lean distribution )
can maintain low inventory levels and purchase products and materials in small quantities
only when needed. Usually there is no safety stock in a JIT system. Suppliers are expected to
provide consistently high-quality products. JIT inventory management requires a high level
of coordination between producers and suppliers, but it eliminates waste and reduces inven-
tory costs. This approach is popular among many well-known firms, including Dell Computer
and Honda. Toyota was a pioneer of JIT distribution. More recently, Harley Davidson applied
JIT distribution methods to reduce costs, increase production flexibility, and improve supply-
chain management. The alterations to its supply-chain management system helped Harley
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successfully turn the business around from near failure. When a JIT approach is used in a
supply chain, suppliers may move operations close to their major customers in order to pro-
vide goods as quickly as possible.

Materials Handling

Materials handling , the physical handling of tangible goods, supplies, and resources, is an
important factor in warehouse operations, as well as in transportation from points of pro-
duction to points of consumption. Efficient procedures and techniques for materials han-
dling minimize inventory management costs, reduce the number of times a good is handled,
improve customer service, and increase customer satisfaction. Systems for packaging, label-
ing, loading, and movement must be coordinated to maximize cost reduction and customer
satisfaction.
Many fi rms use radio waves to track materials tagged with radio frequency identifi ca-
tion (RFID) through every phase of handling. RFID has greatly improved shipment tracking
and reduced cycle times. Hundreds of RFID tags can be read at a time, which represents
an advantage over bar codes. Firms are discovering that RFID technology has very broad
applications, from tracking inventory to paying for goods and services, even asset manage-
ment, and for data collection. For instance, Disney theme parks even use RFID in visitor
wristbands. The MyMagic+ bands encode visitor wristbands with credit card information,
just-in-time (JIT) An
allowing them to make purchases with the swipe of a wrist. RFID technology tracks their
inventory-management
movements within the park to alert them when it is their turn for a nearby ride. Some stake- approach in which supplies
holders are concerned about how much information Disney will be able to collect using the arrive just when needed for
data from wristbands, but many of Disney Parks’ 30 million annual visitors look forward to production or resale
the chance to not worry about money and not having to stand in line. The technology will materials handling Physical
undoubtedly lead to better customer service and an increased understanding of how visitors handling of tangible goods,
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spend their time and money. supplies, and resources

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