A RECENT ARTICLE in the Wall Street Journal, “Target Expands Inventories to Repair Stock-Outs,” once again highlights the dilemma facing the nation’s largest retailers when it comes to getting stock levels right.
The article quotes Target COO John Mulligan, who said the retailer had upped inventory levels by as much as 50% on some high-demand items and a 4% increase store-wide. For a chain of Target’s size (sales of $17.6 billion in Q3 2015), that surely amounts to a commitment of billions of dollars in invested capital.
Is more inventory a good thing? Will there be a sufficient payback from out-of-stocks avoided and shopper satisfaction? Will post-holiday markdowns create off-setting margin decreases?
Just a few months earlier, its huge rival Walmart had reported an overall inventory increase of 2.2% that Greg Foran, chief executive of Walmart U.S., said was mostly being held further upstream, to keep back rooms less cluttered and maintain flexibility required by its omni-channel strategy.
There’s nothing too unusual about keeping inventory slightly in excess of expected sales for safety (or “buffer”) purposes, and it may be prudent to increase stock on hand for “anticipatory” reasons, such as expected soaring holiday demand for certain toys, electronics, and apparel.
Itasca Retail has always recognized that retailers are challenged with balancing inventory to sales. The conventional-looking tactics of Target and Walmart, however, expose what we think may be some limitations in how these two huge retailers manage their ordering and inventory levels.
Systematic over-stocking creates lower turns and profits and higher shrink. When these inevitably occur, retailers respond by adjusting inventory downwards again, and the cycle continues.
At Itasca we know from more than 15 years of experience optimizing inventories in more than 1,300 stores that the better way is to have the right inventories at the right mix at the right time. Our clients learn to break the cycle. They trim store inventories while simultaneously slashing out of stocks, increasing turns and growing their sales. Their results are sustained and the benefits extend up the supply chain in the form of lower inventories and even fewer delivery truck miles.
How can this be possible while retail giants struggle? We’d like to explain this to you. We have the evidence to back it up, and the know-how to put your stores on the fast track to inventory optimization.
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