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# For an online retailer, inventory represents a major source of cost. E

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For an online retailer, inventory represents a major source of cost. E  [#permalink]

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Updated on: 09 Oct 2019, 02:23
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New Project RC Butler 2019 - Practice 2 RC Passages Everyday
Passage # 300, Date : 30-Aug-2019
This post is a part of New Project RC Butler 2019. Click here for Details

For an online retailer, inventory represents a major source of cost. Every item of inventory represents an item that has not been sold and which therefore represents unrealized gains. Moreover, the greater the inventory a retailer must hold the anticipation of filling customer orders, the greater the amount of money it must have invested in something that cannot be used for other purposes. Two tenets of inventory management are to turn over inventory as quickly as possible and to hold the minimum amount of inventory necessary to fulfill tomorrow's orders efficiently. Those two challenges are related. If lower levels of inventory are needed, then less inventory will be on hand and it will be turned over more quickly. In competing with another online retailer, however, a company will be inclined to hold inventory of as many items as exist. If a particular type of item is not in stock at one retailer, a customer will turn to a competing retailer. Holding all of the possible stock items in stock adds to inventory cost. A solution to this issue has been previously for a company to have one central, monster-sized warehouse. Centralizing inventory allows a company to hold the widest possible range of items at the lowest necessary levels. But since customers also value speed of delivery time, the "monster warehouse model" has a flaw in that it involves shipping from a location which may not be as close to a customer's location as otherwise and which therefore would be vulnerable to a competitor who can deliver faster.

These considerations highlight the importance of information about consumer demand. At the basic level, knowing what items sell helps brick-and-mortar retailers determine what items to stock. In competitive online retail, companies with good data can stock minimum sufficient inventory levels. Even more significant, a national retailer that can forecast demand for specific items by region can move from the monster warehouse model to a system of regional warehouses, decreasing shipping time without increasing inventory costs.

1. The passage suggests that in order for an online retailer to compete effectively with other online retailers, it must

A. turn over its inventory more quickly than its direct competitors, while holding the minimum amount necessary
B. maintain the lowest possible inventory costs without sacrificing a wide range of inventory
C. hold an inventory diverse enough to keep from losing customers to competitors
D. hold an inventory of higher-quality items than direct competitors
E. make deliveries faster than competitors do, whether from a centralized or regional warehouse system

2. The passage suggests that which of the following is true of a centralized warehouse model?

A. It was a useful model for a time to keep inventory models low, but it is now obsolete, due to the increased delivery time of shipping from one central location.
B. It allows a company to hold the widest possible range of items at the highest necessary inventory levels.
C. It is the only currently feasible inventory warehouse system that strikes a balance between inventory levels, inventory diversity, and delivery time.
D. It is most suitable for online retailers facing high levels of competition.
E. It can be used to lower standing inventory levels, but it is not necessarily the most advantageous inventory model that can be used.

3. In the context of the passage as a whole, the second paragraph serves primarily to

A. draw a further conclusion based on the information presented in the first paragraph
B. refute objections to the argument presented in the first paragraph
C. evaluate alternatives introduced in the first paragraph
D. point out one potential pitfalls of adopting the advice presented in the first paragraph
E. present information that undermines the conclusion drawn in the first paragraph

4. The passage LEAST supports the inference that one or more elements of an online retailer's business would be adversely affected by

A. stocking inventory at levels that are higher than the minimum needed
B. stocking inventory at levels that are lower than the minimum needed
C. failing to stock a particular item that a customer may seek out
D. failing to deliver faster than the industry's average delivery time
E. failing to turn over inventory quickly

5. The primary purpose of the passage is to

A. describe various factors involved in managing inventory in online retailing
B. show that online retailers frequently gain a competitive advantage from a system of regional warehouses
C. argue that online retailers often fail because of inadequate inventory management practices
D. suggest that online retail is likely to be dominated by firms that use centralized monster warehouses
E. explain how information about consumer demand is the most important factor in managing inventory in online retail

Source: GMAT Free (8)
Difficulty Level: 700

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Last edited by SajjadAhmad on 09 Oct 2019, 02:23, edited 1 time in total.
Updated - Complete topic (880).
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Re: For an online retailer, inventory represents a major source of cost. E  [#permalink]

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02 Sep 2019, 20:02
1
Para 1 Summary – Author discusses what problems inventory management are for an online retailer. He/she identifies two aspects of inventory management which are related to each other. What possible mistakes an online retailer might make are also mentioned. Later, author proposes a solution to the problem in the form of centralized warehousing but cautions about its flaw.

Para 2 Summary – Considering the discussion in first para author talks about the importance of information which an online retailer can take help off to keep stock at optimum levels. Thus, online retailer would be able to forecast demand item-wise and region-wise to counter the disadvantages of centralized warehousing.

1. The passage suggests that in order for an online retailer to compete effectively with other online retailers, it must
A. turn over its inventory more quickly than its direct competitors, while holding the minimum amount necessary – WRONG. While this may be true but to remain competitive i.e. such that customer don’t turn to competitors, the retailer must maintain a range of product available in stocks.
B. maintain the lowest possible inventory costs without sacrificing a wide range of inventory – WRONG. Cost perspective not discussed.
C. hold an inventory diverse enough to keep from losing customers to competitors – CORRECT. The lines “In competing with another online retailer, however, a company will be inclined to hold inventory of as many items as exist. If a particular type of item is not in stock at one retailer, a customer will turn to a competing retailer” in para 1 suggest that author is of the opinion that quantity won’t help a retailer but the vast range of items in stock.
D. hold an inventory of higher-quality items than direct competitors – WRONG. High-quality items not discussed.
E. make deliveries faster than competitors do, whether from a centralized or regional warehouse system – WRONG. At this point in time in the passage the author does not say so.

2. The passage suggests that which of the following is true of a centralized warehouse model?
Marked B which is wrong. Widest range of items but not highest inventory level.
A. It was a useful model for a time to keep inventory models low, but it is now obsolete, due to the increased delivery time of shipping from one central location. – WRONG. Obsoleteness o centralzed warehouse model s not reered by author ever.
B. It allows a company to hold the widest possible range of items at the highest necessary inventory levels. – WRONG.
C. It is the only currently feasible inventory warehouse system that strikes a balance between inventory levels, inventory diversity, and delivery time. – WRONG. Author mentioned a disadvantage of the centralized system not advantage.
D. It is most suitable for online retailers facing high levels of competition. – WRONG. Exactly the opposite to what is stated in passage.
E. It can be used to lower standing inventory levels, but it is not necessarily the most advantageous inventory model that can be used. – CORRECT. Both points ‘lower standing inventory levels’ and ‘not the most advantageous’ are true in this option.

3. In the context of the passage as a whole, the second paragraph serves primarily to
A. draw a further conclusion based on the information presented in the first paragraph – CORRECT.
B. refute objections to the argument presented in the first paragraph – WRONG. Author never offers an opinion in the passage.
C. evaluate alternatives introduced in the first paragraph – WRONG. He/she does not evaluate but speculates only in 2nd para.
D. point out one potential pitfalls of adopting the advice presented in the first paragraph – WRONG. Though author mentions good thing about the centralized warehousing model but he/she also cautions about its disadvantage in first para so no advice as such s given.
E. present information that undermines the conclusion drawn in the first paragraph – WRONG. Author takes point discussed in 1st para and adds to it what ‘information’ as a whole could do to help online retailers.

4. The passage LEAST supports the inference that one or more elements of an online retailer's business would be adversely affected by
Marked B but its wrong. Thought that stocking inventory lower than minimum would create problem. Still the option looks close to being correct.
A. stocking inventory at levels that are higher than the minimum needed – WRONG. Author is certainly against what is mentioned in this choice as discussed in para 1.
B. stocking inventory at levels that are lower than the minimum needed – WRONG.
C. failing to stock a particular item that a customer may seek out – WRONG. Discussed in 1st para.
D. failing to deliver faster than the industry's average delivery time – CORRECT. Failing to deliver faster hold true but a comparison with industry’s average time is not discussed.
E. failing to turn over inventory quickly – WRONG. Mentioned in passage.

5. The primary purpose of the passage is to
A. describe various factors involved in managing inventory in online retailing – CORRECT. That’s exactly what author is doing in para 1 and support the actors with positive speculation in para 2.
B. show that online retailers frequently gain a competitive advantage from a system of regional warehouses – WRONG. Not discussed. Irrelevant.
C. argue that online retailers often fail because of inadequate inventory management practices – WRONG. True that it is possible but the option has limited scope.
D. suggest that online retail is likely to be dominated by firms that use centralized monster warehouses – WRONG. Option has limited scope.
E. explain how information about consumer demand is the most important factor in managing inventory in online retail – WRONG. Certainly its important but Customer demand is not discussed only in whole passage.

10 min 2 sec.
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Ephemeral Epiphany..!

GMATPREP1 590(Q48,V23) March 6, 2019
GMATPREP2 610(Q44,V29) June 10, 2019
GMATPREPSoft1 680(Q48,V35) June 26, 2019
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GMAT 1: 580 Q43 V27
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Re: For an online retailer, inventory represents a major source of cost. E  [#permalink]

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02 Sep 2019, 20:03
How option B is wrong for Q2...!!?
Can anyone explain.
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Ephemeral Epiphany..!

GMATPREP1 590(Q48,V23) March 6, 2019
GMATPREP2 610(Q44,V29) June 10, 2019
GMATPREPSoft1 680(Q48,V35) June 26, 2019
GMAT Club team member
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Re: For an online retailer, inventory represents a major source of cost. E  [#permalink]

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03 Sep 2019, 04:16
Official Explanation

2. The passage suggests that which of the following is true of a centralized warehouse model?

Difficulty Level: 700

Explanation

This question asks about the centralized model, which is the "monster" warehouse model. In this question, again, "suggests" could be "directly states" or "strongly implies." What's true of the warehouse model?

Choice (A) encourages us to consider how much opinion is in the passage, something we probably should have considered earlier. The passage is fairly low on the opinion; a bit of the author's passion edges in when he discusses the importance of information, but otherwise the passage is largely factual. The author is not decisive in calling one inventory model better than another. If and once you are convinced of this, answer choices (A), (C), and (D) are out as expressing too strong a judgment. We have reason to believe that the author might actually prefer the regional model discussed at the end of the passage under certain conditions (with superior information), but even on that he is not decisive. Next, choice (B) is a distortion of the truth; it's close to what the passage says, but (B) says at the highest necessary levels, not the lowest possible levels.

Hope it helps

lnm87 wrote:
How option B is wrong for Q2...!!?
Can anyone explain.

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Re: For an online retailer, inventory represents a major source of cost. E   [#permalink] 03 Sep 2019, 04:16