Tag: retailers

OM in the News: JIT Makes a Retail Comeback

Retailers are reviving an old playbook to manage their inventory levels after four years of struggling to find the sweet spot of holding enough merchandise but not too much, reports The Wall Street Journal (Jan. 24, 2024). They have worked through the excess inventory that piled up on store shelves and in warehouses over the past 18 months, and are now focusing on replenishing items rather than stocking up on goods to have on hand in case of supply-chain disruptions.

The shift marks a return to the “just-in-time” inventory management strategy (our topic in Chapter 16) that many companies had employed before pandemic-driven product shortages and volatile shifts in consumer demand prompted a switch to a “just-in-case” stockpiling approach. Companies are now better able to predict shopper demand and feel they can hold leaner inventories amid moderating spending growth and fewer supply-chain disruptions. They prefer not to hold large inventories because the excess stock ties up capital, requires more space and people to manage it, and runs the risk of becoming outdated as trends change.

“Retailers have more confidence in the overall supply chain and the logistics network and the environment, and as a result, they’re saying we’re at a point now where we’re safe to go back to JIT,” says Ohio State U. Prof Terry Esper. The SCM head at Tailored Brands adds: “The ability to react to changes in demand means the company has no need for ‘safety stock’ inventory.”

Retailers such as Walmart have rolled out technology aimed at fixing forecasting tools that were broken during the pandemic as they seek to better understand what consumers are buying and more accurately predict demand. The technology is allowing merchants to have smaller, more accurate shipments than they have in the past. “We’re able to better predict lead times, we’re able to better execute review cycles, and as we do that better, we’re able to hit target inventory levels,” says Walmart’s VP for SCM.

Still, new supply-chain disruptions could prompt a different approach and bring in more excess stock. Recent attacks by Houthi rebels in Yemen on containerships have pushed companies to reroute shipments over longer distances to avoid the Suez Canal, and low water levels at the Panama Canal have slowed some deliveries.

Classroom discussion questions:
1. Why the return to JIT?
2. Will there be less volatility in supply chains from this point on?

OM in the News: Retailers, Rising Theft and Shrinkage

As retailers report on the busy holiday shopping season, operations managers will be trying to get more understanding into shrinkage and theft, reports The Wall Street Journal (Jan. 9, 2024). The stores are fighting a growing wave of theft, cutting into profits that were already under pressure. But theft is just one contributor to shrink, the industry term for the difference between inventory on the books and what’s physically on hand. Lost or damaged goods and inaccurate records also play a part.

Shrink is now one of the most frequently discussed topics among management at Home Depot, said the firm’s CFO, having moved onto its list of top priorities two years ago. That focus hasn’t changed even though some mitigation efforts, such as locking up certain items and using live-view parking lot cameras, are in place.

The higher shrink may partly reflect a return to prepandemic norms rather than entirely new trends in theft. Reduced visits to physical stores starting in 2020 simultaneously decreased the opportunities for theft, an effect that dissipated as shoppers stepped out of their houses again.

Dollar General’s gross profit rate, or its profit as a percentage of net sales, fell 5% last quarter, due primarily to increased inventory shrink, more markdowns and lower inventory markups. Shrink is a roughly 100-basis-point headwind for Dollar General. Dick’s Sporting Goods  expects shrink’s impact on its gross margin to be roughly 50 basis points higher in its current fiscal year compared with 2022.

Retailers have said they are responding by adding security personnel and technology, locking up goods and closing hard-hit stores. Target, which last year said that shrink was expected to cut into profitability by more than $500 million, closed nine stores, citing higher theft and safety concerns for shoppers and workers. Nike closed one of its Portland stores in 2022 amid issues with theft. Academy Sports & Outdoors is using locked shelves for certain items and outfitting some departments that have seen higher shrink, such as the baseball bat section, with sensors that indicate when people linger in an area. Some retailers, such as Costco, are less exposed to theft for reasons including that they sell larger, harder-to-steal products, and stores are laid out with one primary entrance and exit.

Classroom discussion questions:

  1. Why is this an OM issue?
  2. What would you do, as a supermarket manager, to cut shrink?

OM in the News: The Company That Makes 11-Month Forecasts

Sorry about that White Christmas, Philadelphia. It’s not looking good; temperatures are going to be at least in the 40s. Looking further ahead and afield: Come March, warm weather will boost shorts sales 28% in Chicago over last year, but the shorts business will be off a cool 15% in Tokyo. Oh, and good news for travelers: Flight delays at Philadelphia International Airport will be down 42% next year, compared with 2019, thanks to considerably less precipitation.

That is all according to  Weather Trends International, a Pennsylvania-based company that sells long-range — as in 11 months in advance — forecasts to retailers and investors, writes The Philadelphia Inquirer (Dec. 9, 2019). Home Depot, Target and Walmart,  JP Morgan, and Coca-Cola have all been customers. Reliable year-ahead forecasts would be invaluable to retailers. “Once merchandise has been put out for the season,” said an exec, “the cake is baked.” (Once a customer purchases an 11-month outlook, by the way, the company doesn’t change or update them).

Weather Trend’s formula is about two-thirds statistical analysis and the rest an analytical blend that includes weather “cycles,” primarily slow-occurring shifts in ocean temperatures and air pressure patterns, including the El Niño/Southern Oscillation and the Pacific Decadal Oscillation–plus 417 trillion bits of data. Temperature forecasts can be calibrated to retail sales: A one-degree difference makes a 15% change in air-conditioner sales and a 7% difference in the sunscreen business. A study by two climatologists concluded that for temperatures, the Weather Trends’ year-a-head forecast outperformed the U.S. Climate Prediction Center’s 3 month forecasts, which are updated monthly, four out of five times.

This is an interesting variation from the 3 types of forecasts (i.e., economic, technological, and demand) that we discuss in Chapter 4.

Classroom discussion questions:
1. Referring to “Forecasting Time Horizons” in your Heizer/Render/Munson text, how do short term forecasts differ from longer ones?

2.  Why is a weather forecast an OM tool?

 

OM in the News: Department Stores Keeping a Tight Lid on Inventory This Year

“With foot traffic at their stores in decline, department stores that would have stocked up for the biggest shopping season of the year months ago are still in the process of placing new orders,” writes Supply & Demand Chain Executive (Nov. 8, 2017). The strategy is aimed to keep their inventory costs down and avoid the experience of previous holiday seasons, when large piles of unsold stock led to deep markdowns that eroded profits. But these retailers risk losing sales if supplies run out at a time when many are struggling to keep up with Amazon and the shift towards online shopping.

Macy’s, J.C Penney, Kohl’s, Nordstrom, Dillard’s, Lord & Taylor are among the retailers buying in smaller batches with shorter lead times this year and relying on a more dynamic demand forecasting process than in the past. Keeping inventory levels low helps manage costs, and may also instill urgency in consumers to spend now rather than hold off on purchases in search of a better deal. But it also risks alienating customers who may end up having less choice, and is also putting strain on vendors to deliver on shorter lead times.

The high-stakes strategy takes a page from the playbook of  Zara, H&M, and other “fast fashion” retailers that consistently keep low inventories of trendy clothes and try to win customers with cheap prices. Traditionally, retailers lock in most of their purchases 9-12 months in advance. This year, retailers started placing a large portion of their holiday orders 3-4 months before the holiday season, and are refreshing fast-selling items within as little as 6-8 weeks.

The risk: Department stores rely on vendors whose traditional supply chains are not built for a fast turnaround, because they handle orders for several brands. Fast-fashion chains, on the other hand, have designed their supply chain to shift on a week to week basis and work with vendors who can deliver quickly on private label items they stock. So far this year, retailers have been willing to sacrifice some orders for tighter inventory management and higher margins.

Classroom discussion questions:

  1. What are the advantages and disadvantages of the smaller batch approach?
  2. What strategy do fast fashion retailers use?