Marketing & Sales Tools
Understanding Their Role
In a perfect world, retailers would source products, and they would flow through supply chains to hit shelves at the very moment shoppers wanted to buy them. This is impossible, of course, because retailers do not know exactly what shoppers are going to buy at any one time, so retailers must stock inventory.1 Inventory includes products in warehouses, distribution centers, on trucks on the way to stores, and items sitting on the store shelves. Inventory represents around 20% of a large retailer’s assets2 , and ties up a significant amount of cash that could be better used to improve the customer experience, product assortment, technology, etc. Storing inventory is extremely expensive, and retailers are generally trying to reduce inventory levels. Reducing inventory too much, though, could result in a “stockout”, costing the store a sale and harming customer satisfaction. Retailers spend considerable resources and effort on finding a balance between the cost of holding inventory, and the risk of stocking out of an item.3
If retailers significantly misjudge consumer demand for an item, they end up with a stockpile of inventory at risk of spoiling or becoming obsolete, and tying up cash needed to buy products that are in demand. Retailers must markdown these products to move them out of inventory, sell them in bulk to another retailer at a huge reduction, or even dump the items, all of which reduces profits.4 Retailers, and their investors, watch inventory levels closely as an important indicator of the organization’s health. If inventory levels rise, is might signal a future drop in profit as the retailer clears out excess stock.5
“The off-price business is a volume game: selling a ton of goods and selling them fast. TJX [T.J. Maxx] does that every 55 days, vs. 85 for its peer group…, the company is structured to whisk items through its distribution centers and stores” – Fortune. 6
1 Barnes, Jim. “The Myths and Truths about Inventory Optimization.” Supply Chain Management Review 18, no. 2 (2014): 10 – 19. EBSCOhost(94934496).
2 Gaur, Vishal, Saravanan Kesavan, and Ananth Raman. “Retail Inventory: Managing The Canary In The Coal Mine.” California Management Review 56, no. 2 (2014): 55 – 76. EBSCOhost(94587931).
4 Berman, Barry, and Joel R. Evans. Retail Management: A Strategic Approach 12th Ed. Edited by Pearson Education, Inc., Prentice Hall., 2013.
5 Gaur, Vishal, et al. “Retail Inventory: Managing….”
6 Kowitt, Beth. “Is T.J. Maxx the best retail store in the land?” July 2014. Fortune. Available at: http://fortune.com/2014/07/24/t-j-maxx-the-best-re...
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