Ordering costs are reduced by developing close relationships with suppliers. Negotiating
long-term contracts for the supply of outside materials will obviously reduce the
number of orders and the associated ordering costs. Retailers have found a way to reduce
ordering costs by adopting an arrangement known as continuous replenishment.
Continuous replenishment means a manufacturer assumes the inventory management
function for the retailer. The manufacturer tells the retailer when and how much stock
to reorder. The retailer reviews the recommendation and approves the order if it makes
sense. Wal-Mart and Procter & Gamble, for example, use this arrangement.5 The
arrangement has reduced inventories for Wal-Mart and has also reduced stock-out problems.
Additionally, Wal-Mart often sells Procter & Gamble’s goods before it has to pay
for them. Procter & Gamble, on the other hand, has become a preferred supplier, has
more and better shelf space, and also has less demand uncertainty. The ability to project
demand more accurately allows Procter & Gamble to produce and deliver continuously
in smaller lots—a goal of JIT manufacturing. Similar arrangements can be made
between manufacturers and suppliers