By Jonny Lupsha, Wondrium Staff Writer
Canceled basketball tournament games have led to a national chicken wing surplus, The Washington Post reported. The economy has slowed due to the spread of coronavirus and plummeting wing prices are an unexpected side effect. Right-sizing inventory is crucial for businesses.
According to The Washington Post, wing sales usually see two huge spikes in the first three months of the year. “Wing prices and production run in predictable cycles each year, ramping up for the NFL playoffs and championship game in early February, then again for college basketball’s frenzied tournament a month and a half later,” the article said.
“But with society in lock down because of the novel coronavirus and the NCAA tournament canceled, that’s left a whole bunch of wings lying around, and now they’ve flooded the market. Ergo, we have a giant national surplus of chicken wings.”
Overstocking and understocking inventory are two huge wastes of money in business operations. Walking the line between the two is challenging, yet manageable. As stated above, right-sizing inventory is crucial for businesses.
Too Much of a Good Thing
Stores maintain inventory so they can sell their products to customers rather than force them to deal with a stockout.
“A stockout is when we fail to serve a customer because we lack the inventory, and customers can react in any number of ways to a stockout,” said Dr. Thomas J. Goldsby, the Harry T. Mangurian Jr. Foundation Professor of Business and Professor of Logistics at The Ohio State University’s Fisher College of Business.
“They might be courteous and accept a back order, a rain check if you will, a promise to provide the goods once we have the inventory available. Increasingly, though, they’re not so understanding; instead, they’re likely to look for a substitute item, but they’re also prone to getting frustrated and giving up on the item altogether.”
On the other hand, having too much of an item is also a problem. Dr. Goldsby said that companies measure the cost of holding onto inventory in a metric called inventory carrying costs or holding costs.
“The primary component of inventory carrying cost is the opportunity cost of capital: having money tied up in inventory that could be put to use somewhere in the business,” he said. “In other words, if you have $10,000 of inventory, what else could you be doing with it? Maybe you could invest in new products or new technology; you could invest in training and education of your staff, or maybe upgrading facilities.”
Dr. Goldsby added that there are also risks associated with sitting on unsold inventory. That inventory could get stolen, or it may sit on shelves so long it becomes obsolete. In the case of chicken wings or other food items, it could spoil and need to be thrown away.
Two Philosophies of Inventory Management
The easiest philosophy to remember for managing inventory in a business is called a fixed quantity-fixed frequency strategy.
“This is where you order the same quantity every time you need replenishment, and you place this order on a scheduled basis,” Dr. Goldsby said. “This is the arrangement that I have with my local newspaper—they deliver precisely one newspaper to me every day. That’s a fixed quantity on a fixed frequency.”
The other philosophy of inventory management uses what Dr. Goldsby called “reorder point logic.” This means that a business makes its first inventory order, and as it depletes its supply, it reaches a certain number of remaining, on-hand inventory and then orders more inventory before the items run out, early enough to allow for delivery time.
Three Strategies of Reorder Point Logic
Reorder point logic breaks down into three inventory strategies.
“One strategy doesn’t require us to keep close tabs on inventory,” Dr. Goldsby said. “Instead, we might check inventory, say, every five or 10 days. That would be a periodic review method, or P system. This strategy is also sometimes referred to as a min-max approach.”
The periodic review method leaves companies in danger of stockouts if they don’t pay close attention to stock in real time. So, the other two reorder point logic strategies try to fix that. One involves ordering fixed quantities of items; the other involves variable quantities.
“Using the fixed-quantity strategy, known as a Q system, a company might order as needed in minimum order quantities imposed by the supplier, or the company might determine the quantities that it feels are best,” Dr. Goldsby said. “One fixed-quantity approach that has been a mainstay for over a century now is something called Economic Order Quantity, or EOQ. The EOQ balances the annual cost of holding inventory and the annual administrative cost of processing orders.”
The final strategy is neither tied to fixed schedules nor fixed quantities and is known as a just-in-time (JIT) strategy. Dr. Goldsby said the primary difference between it and the others is that it requires a lot of focus and discipline, since “inventory is kept to an absolute minimum, yet running out of it can literally shut down the business.”
“Rather than counting on large lots and infrequent ordering, JIT companies resort to very small order batch sizes and high frequency,” he said. “When demand is brisk, they increase either the batch size or the order frequency depending on the costs of doing each. However, the focus is on keeping inventories low and replenishing only what’s depleted when it’s depleted.”
Grocers and restaurants tend to order large amounts of chicken wings in advance of playoffs and tournament games in football and basketball. With the country locked down due to the coronavirus, they need to hope they can make up for their inventory carrying costs somewhere else.
Dr. .Thomas J. Goldsby contributed to this article. Dr. Goldsby is the Harry T. Mangurian Jr. Foundation Professor of Business and Professor of Logistics at The Ohio State University’s Fisher College of Business. He holds an M.B.A. from the University of Kentucky and a Ph.D. in Marketing and Logistics from Michigan State University.