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The nature of inventory can evoke a lot of opinion and management response. Most senior financial managers and some CEO’s believe that too much inventory is a detriment to working capital performance. It is just plain, evil. Marketing and sales executives view inventory as an ultimate enabler, and having inventory of a hot selling product is tantamount to ‘candy’ to a child, or exclaims, “Give me more!”
Our community knows all too well that having the right balance and composition of inventory is the real test in the ability to satisfy all stakeholders. A previous mentor of mine, Larry Lapide would often evoke the cholesterol analogy regarding inventory in his presentations to clients. There is good and there is bad cholesterol in our bodies, and the challenge is to optimize good and minimize the bad as much as possible.
There is a rather interesting business situation being played out, which includes inventory, and it involves supply chain icon Wal-Mart. The world’s largest retailer recently reported its fiscal Q3 quarterly earnings, and while announcing a 9 percent increase in profitability, this retailer experienced the sixth straight quarter of declining growth in existing U.S. outlets. Nearly a fourth of overall sales now originate from non-U.S. retail outlets. Wal-Mart is quick to note that the condition of U.S. consumers has a lot to do with fueling this declining U.S. sales trend. The retailer points to a “pronounced” pattern of store sales at the beginning of the month, as soon as paychecks and welfare payments are issued. The implication is that U.S. retail consumers have little to spend, have a difficult time in managing cash flow, and have a very keen focus on value. Meanwhile, rival retailer Target Corp. recently reported a 1.6 percent increase in same store sales, with traffic counts up by 2.1 percent.
For those readers unfamiliar with the Wal-Mart situation, there is some history to reflect upon. Wal-Mart suppliers are acutely aware of the relentless focus on supply chain cost, which includes inventory, payables and process efficiencies. The latest initiative is a program directed at purchasing more goods directly from select global suppliers, bypassing intermediaries. Wal-Mart believed that it could gain even more efficiency through direct purchases of standard items.
In late 2009, Wal-Mart embarked on an aggressive store re-vamp and inventory reduction program. The intent was to stock only high volume, high demand intems while creating a more streamlined, uncluttered look and feel to a Wal-Mart U.S. store. The premise was value at traditional low prices. Gone were the days of stocked pallets placed in main shopping aisles giving the appearance of a cluttered warehouse atmosphere. The new merchandising plan was designed to help customers navigate easier and located expensive or impulse items in select high-traffic areas.
At mid-year, Wal-Mart reversed course, re-assigned certain U.S. management, and is now adding more merchandise variety to stores. The Wall Street Journal noted that inventory has grown 7.7 percent compared to a year earlier. By my calculation, in the most recent quarter, days sales of inventory is up to its highest level ever, no doubt in anticipation of an aggressive holiday buying season.
Rival Target has also embarked on a revised U.S. store merchandising program, but the results thus far, seem to be different. Target speaks to a strategy that allows customers to indulge in small, affordable ways. Target also emphasizes that it is striving to constantly listen to customers and fulfill customer shopping needs. Both retailers currently stand at very similar days inventory outstanding profiles, yet U.S. sales performance is different. In food and grocery items, Target is boosting food item selection with strong indications that this has been a multiplier effect on same store sales. Wal-Mart on the other hand, may be losing food and grocery sales to not only Target, but a Costco Wholesale as well.
Technology and business process methodologies have come a long way in the ability to optimize merchandising, plan shelf space, analyze and optimize inventory investments based on consumer needs and revenue targets. Management behavior or intuition it seems, has not made the same rate of progress.
What’s your view?