Desperate for profits, retailers reinvent inventory strategies
Proper supply chain inventory management is necessary to the success of a company. Arthur Peck, CEO of Gap, explained that he has “zero patience for a lack of operating discipline” when his managers inappropriately organize their retail supply chain inventory. Late last year, Gap experienced a serious conflict with their inventory systems. Their poor supervision of inventory resulted in high operating expenses and an excess amount in inventory. This surplus has led to undesired markdowns in price in the beginning of 2018 and will continue to damage Gap’s margins.
A significant majority of these faulty supply chain inventory levels can be attributed to the volatile demand behind digital retail. Prior to the surge in online sales, companies could get a solid grasp of in-store demand and effectively plan out their brick-and-mortar inventory levels to meet that demand. Thus, supply chain inventory levels would be updated on a consistent basis with a solid idea of the size demand coming their way. With digital sales however, a product may have to get shipped to various different locations before being transported to its buyer. Also, there is more unpredictability of which product will be sold and to where, so retailers must be cautious with their inventory levels. And of course, with e-commerce increasingly becoming the more popular choice of distribution, managers must be on edge regarding how to appropriately combat inefficient inventory levels.
In order to avoid high inventory and storage costs, many retailers have shut down stores, moved products to a universal warehouse location, and even kept lower on-hand inventory levels to accommodate sporadic e-commerce. J.C. Penny did just this and increased their online SKU count by 50% in 2017. The retailer also utilizes inventory from their physical stores to fulfill online orders.
As e-commerce continues to bolster in popularity, and as the Amazon effect persistently negatively affects retailers, I think supply chain managers need to make quick decisions and achieve inventory levels that allow for quick distribution but also maintains a workable size of inventory. With more inventory, the retailer can ship more products out quicker, but will face unwanted operation expenses and margins. Yet, with a smaller inventory size, the company will experience a minimized amount of product availability, so delivery time will be slow. Achieving a happy medium between the two previously mention scenarios should yield the supply chain manager with the most ideal results.
I personally think companies should sacrifice product availability rather than maintaining high inventory levels. I mainly believe this because having higher inventory levels hinder your financial statements. With higher costs of goods sold along with increased end-of-year inventory and other expenses, public companies may look less desirable to investors as their earnings per share will be negatively affected. Accordingly, I think sacrificing speed of delivery or quickness of transferring inventory is the correct move for retailers to make.
Question to consider: As we discussed in precious postings, I would be curious to see in the future how AI directly affects supply chain inventory levels. Could artificial intelligence accurately forecast online demand and improve inventory methods?