GMAT Reading Comprehension - For an Online Retailer, Inventory Represents a Major Source

Reading Passage Question

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.

‘For an online retailer, inventory represents a major source’ is a GMAT reading comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.

This GMAT Reading Comprehension consists of 7 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analyzing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solution and Explanation

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

1. turn over its inventory more quickly than its direct competitors, while holding the minimum amount necessary
2. maintain the lowest possible inventory costs without sacrificing a wide range of inventory
3. hold an inventory diverse enough to keep from losing customers to competitors
4. hold an inventory of higher-quality items than direct competitors
5. 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?

1. 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.
2. It allows a company to hold the widest possible range of items at the highest necessary inventory levels.
3. It is the only currently feasible inventory warehouse system that strikes a balance between inventory levels, inventory diversity, and delivery time.
4. It is most suitable for online retailers facing high levels of competition.
5. 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

1. draw a further conclusion based on the information presented in the first paragraph
2. refute objections to the argument presented in the first paragraph
3. evaluate alternatives introduced in the first paragraph
4. point out one potential pitfall of adopting the advice presented in the first paragraph
5. 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

1. stocking inventory at levels that are higher than the minimum needed
2. stocking inventory at levels that are lower than the minimum needed
3. failing to stock a particular item that a customer may seek out
4. failing to deliver faster than the industry's average delivery time
5. failing to turn over inventory quickly

5. The primary purpose of the passage is to

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

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