Retailers are Reducing On-Hand Inventory for the Holidays

shopping mall
Edwin Lopez | November 10, 2017
  • Retailers are shifting their supply chain strategy, reducing on-hand inventory, order size and lead times amid shifting consumer demands this holiday season, Reuters reports.
  • Macy's, J.C. Penney, Kohl's, Nordstrom, Dillard's, Hudson's Bay and Lord & Taylor are among the department stores using a more "dynamic demand forecasting process" this year, as they opt to risk fewer sales in order to improve margins per sale.
  • However, the strategy is also stressing their supply chains, as department store suppliers are unused to fast-fashion. One supplier told Reuters it did not have the "idle capacity" at its Bangladeshi factories to make the shift from a four-week order model to a week-by-week one.

When Gap suffered a warehouse fire in August, 2016, it should have been a disaster. The fulfillment center in New York serviced about 10% of the company's orders, and would eventually cost a 3% net sale loss. But, rather than lament the event, investors that month rewarded Gap with the biggest stock gain since 2008.

The reason, one analyst suggested, was that Gap's warehouse fire may have actually been a saving grace for the company. The items stored in the New York warehouse were old, unpopular stock that kept forcing markdowns on the company and taking up valuable shelf space. Sure, the fire was costly, but excess inventory is hard to get rid of. At least, this way, insurance could cover some losses.

The story above is a cynical and overtly optimistic outlook for what was surely a damaging fire, but it illustrates how desperately retailers are looking for ways to rid themselves of excess inventory. Supply chain managers know too much inventory is costly, chronically reducing net working capital and profit margins. After all, it is difficult to sell what was left unsold in the first place.

Retailers have been facing this issue for years. Overstocks and markdowns are part of the business model. But, as in-store sales, foot traffic and profits decline, companies are troubleshooting for new ways to shave off unnecessary costs; tackling excess inventory is one way.

Having too many products in-store is, at the end of the day, a forecasting problem. If only retailers could know what the consumer wants, and how much they want, they could have just enough product on the shelf for any given day.

Of course, that is easier said than done. After all, not all consumers shop alike, and retailers have to adjust to these multiple markets' diverse needs. The casual shopper, spontaneous customer, buy-online pickup in-store buyer and e-commerce consumer all have different fulfillment needs. This is aggravated by the mixture of selling channels: a customer may now look online for availability before driving to a store for purchase.

In other words, this mix of customers present retailers with an unenviable problem: more spontaneous sales due to higher stock availability, or fewer but more reliable sales due to higher inventory turn-times (more colloquially known as the fast-fashion model). Either model requires a calculated risk with their supply chain, and Reuters' report suggests legacy retailers are beginning to accept the risks inherent in the fast-fashion model, in favor of improved margins.