In this Supply Chain Matters industry specific commentary, we make the observation that retail industry sales and operations planning and demand support teams, given the current state of recent business financial performance, need to up their game in supply network inventory management agility and added responsiveness.
Background and Situational Analysis
Last week’s quarterly financial performance reporting among major U.S. retailers, coupled with prior results, continue to uncover a concerning pattern in regards needs for more agility and risk weighted inventory management and contingency planning capabilities.
In a Supply Chain Matters commentary published in August of last year, we declared that- precision planning and added agility inventory management became essential for multi-channel retailers and wholesalers.
One additional year that now reflects what business media has termed a- “magnitude of miscalculation” reinforces that additional work is required from multiple dimensions.
Latest Developments
In June, Walmart provided an unexpected industry tremor for the Wall Street investment community. The retailer had reported a big earnings miss as higher inventories and supply chain related costs dragged down expected profitability. CEO Doug McMillon indicated at the time that consumers were being impacted by the effects of high inflation and were purchasing more affordable food and groceries, shunning discretionary purchases. The retailer’s overall inventory levels reportedly increased more than 33 percent during the first quarter, a reflection of what was described as an aggressive buying strategy amid supply chain disruptions. Regarding outlook for the remainder of 2022, the Walmart forecasted operating income to decease in a range of 11 percent to 13 percent for the full year.
In the recently reported financial performance for the July ending quarter, Walmart reported that operating income declined 6.8 percent due to higher discounting and the selling of more grocery items at lower margins. Full year operating income expectation was adjusted to the range of 9 percent to 11 percent, after the retailer aggressively throttled down inventory buying, reduced ocean containers in its inventory management network by more than a half, and in initiating actions in trimming corporate staff levels.
In June, rival Target’s CEO Brian Cornell made a bold and counterintuitive industry move. The U.S. retailer acknowledged it had ordered too much inventory relative to shifting consumer demand and announced actions to right-size its inventory as quickly as possible to avoid an ongoing inventory drag. In his communication to investors, Cornell warned investors that the retailer would take an up-front hit on profitability in the coming quarter because of this situation, and that operating margins would shrink to 2 percent in the July ending quarter.
This week’s report of Target’s financial performance reflected that action, but operating margins actually declined to 1.2 percent in the July ending quarter. Executives indicated a swift reversal of shopper buying behaviors continuing, with even less demand for discretionary goods. However, revenues rose 2.6 percent as a result of stronger sales food, groceries and household essentials. Target’s inventory levels actually rose 10 percent in the latest quarter, reportedly in preparation for fall back-to-school and traditional second-half holiday focused shopping.
In somewhat of a contrast, clothing and apparel retail chain Kohl’s in its latest report of quarterly financial performance reported an 8.1 percent decline in revenues on a 7.7 percent decline on comparable same store sales, and a 63 percent decline in net income. CEO Michelle Gass observed that high inflation and dampened consumer sentiment has provided broad implications across much of retail industry, especially apparel and fashion. Since this retailer has concentration in merchandising retail, there was a disproportional impact to this retailer. According to reporting by The Wall Street Journal, inventory levels at Kohl’s rose 48 percent compared to year ago levels. The Journal report cites a GlobalData PLC analyst indicating that this retailer’s problems are more to do with internal missteps and a “random approach to (inventory) buying.”
What Has Since Happened
There is little doubt that retail industry sales and operations teams have been continually challenged these past two plus years, not to mention supply chain management and procurement teams.
In the latter half of 2020 and the first half of 2021, large as well as specialty retailers were financially benefiting from the post-pandemic economy in the U.S. and specifically increased demand for many forms of pandemic related consumer goods. As an example, one year ago, Walmart reported a 5.2 percent comp sales growth while Target reported nearly 9 percent.
Retailers and B2C focused manufacturers were actively accelerating inventory purchases from global based suppliers to avoid being in the position of having not enough inventory to meet pre and post pandemic product demand. As our readership is well aware, disruptions persisted and ultimately came to roost with the unending litanies of supplier, global and domestic transportation delays and disruptions. Transportation and materials costs skyrocketed, as was unanticipated costs related to unplanned or uncontrolled ocean container demurrage, premium air freight, or added inventory warehousing costs. Added fuel surcharges imposed by carriers as a result of rising fuel prices is the latest drag on margins and profitability.
Despite such challenges, it seems there was a sense that even if too much inventory was ultimately ordered, goods would eventually be sold either at full price or discounted values.
What are the Learnings
The current viewpoints now being expressed in financial and industry media was best expressed by a recent Bloomberg Supply Lines report: “Such shifts in (consumer) spending behavior — when combined with over-ordering earlier this year — have left the people who manage supply chains with a costly mess. Products that don’t entice shoppers sit unsold in stores and warehouses, taking up valuable space. That’s why big retailers have been working so hard, and paying such a high price, to get rid of slow-selling discretionary items.”
From our Supply Chain Matters lens, the above statement requires some added learning context.
Sales and operations as well as supply chain management teams indeed had to address and overcome rather significant challenges. Bold and somewhat unprecedented decisions were made that generally focused on boosting inventory levels to overcome unprecedented levels of supply chain material and transportation disruptions. Some might observe that the “bullwhip” principle of too much inventory ordered might have been practiced vs. that of “just-in-case.”
According to data from Freightos, the average shipping transit time from China to U.S. West Coast ports during 2021 rose from 48 days in January, to over 80 days by the end of December. That was in addition to supplier production or inland inter-modal transportation delays. During the first half of 2022, most of that inventory has arrived, along with that which was just-in-case supplementary.
Without rigorous centralized demand planning and overall supply network inventory management tools geared and managed to multi-channel demand, prior revenue and profitability goals may likely not have been accomplished. Without highly collaborative sales and operations decision-making processes informing, simulating various options and seeking executive level concurrence of risk and mitigation actions, such decisions would have been far riskier.
However, is should be obvious in retrospect that some management decision support practices may be missing. Some could be rather basic, while others more advanced technology focused. There is a need for added rethinking of business practices.
Rethinking of Business Practices
For instance, pretending that more agile and risk aware inventory management can be supplemented with spreadsheet-based tools or latent data is likely not a wise route to take. Either are attempting to plan and manage overall inventory by individual channel rather than an all-channel perspective. Consumers in fact shifted buying to in-store vs. online for certain categories or geographies earlier in 2022 as reflected by Amazon’s unexpected observations in June.
Readers may have noted that a year ago, this analyst was highlighting data that could imply a retail inventory bubble was possible, based on the sheer number of material imports. The National Retail Federation (NRF) Port Tracker for August of last year forecasted that the U.S. largest retail ports should establish a new record of 2.37 million TEU’s, a 12.6 year-over year growth at the time.
In making a conscious decision to take on added inventory risks, ensuring that the organization has early warning capabilities to identify when consumer buying patterns have begun to pivot is, and the degree of such demand shifts, is essential. Our observation is that Target had this in mind at the very senior levels of the company. Walmart management, after having to disclose a significant hit to quarterly and full year profitability, was forced to take decisive actions to suspend inventory buying commitments and trim staff levels. How soon was the demand shift identified internally?
We submit that sales and operational as well as integrated business planning teams should consider investing, and they have not done so, in advanced information technology and analytics based decision-making tools. Basic level would include what-if and prescriptive based demand and supply management simulation capabilities that provide teams a more quantified view of inventory management exposures coupled to business performance needs and risks.
More advanced equates to a more insightful outside-in analysis of product demand, supply, global transportation or economic trending data. It includes monitoring industry level inventory to sales ratios, economic forecasting and consumer sentiment data on a far more frequent basis. More advanced correlates with having the ability to analyze periods of high inflation, economic distress or severe climatic and weather events with actual consumer demand patterns, similar to now more common weather-driven product demand analysis.
The weighting inventory needs and levels among domestic, nearshored or global based suppliers, depending upon supply resiliency and business risk mitigation factors is a further consideration. As is having more detailed visibility to inventory in-transit among various modes of transportation, logistics, and storage, factoring that information in the context of existing and likely future consumer demand.
Concluding Thoughts
While retail sales and operations and supply chain management teams have performed yeoman work over these very challenging two years of nonstop disruptions, there is a need to rethink overall business planning processes and enabling tools with different criteria in-mind. Investing in capabilities that provide added sensing of shifting consumer demand patterns or in outside-in driven intelligence that provides added insights to market shifts and industry wide inventory exposures are wise.
Bob Ferrari
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