Reference no: EM13889359

Destocking as a Strategy-

Due to the recent weak economic environment, many retailers have been reluctant to order too many goods, fearing that they will not sell. Among the economic indicators that most concern retailers stocking approach are high unemployment levels, high foreclosure rates in the housing market, fluctuations in the stock market, and gasoline price levels that deter shopping as a result of these concerns, some retailers would rather risk lost sales due to stockouts than have to heavily mark down goods that were ordered in too large quantities. Analysts attribute this low-inventory strategy to retailers remembering the 2008-2009 recession peak. When too many retailers were burdened with high inventories.

To reduce inventory risk, some retailers have begun to carefully evaluate such tactics as their "back-to-school" sales. For a number of retailers, this is the second most critical season (after Christmas) in terms of sales. Other retailers have added alternate suppliers to serve as backups in the case of high demand levels. Macs (www.macys.com) has effectively reduced inventory requirements by working with suppliers to get more store-ready merchandise that does not require distribution centers operated by the retailer. Macys has also lowered its inventory-holding costs by combining store and online inventories in one facility, instead of maintaining separate warehouses for each channel. These changes resulted in Macys saving $5 million in 2010 alone.

These shifts in inventory planning are reflected in the retail business inventory-to-sales ration, which was at 1.33 as of mid-2011, the lowest for this time period since 1992. As a vice president for the National Retail Federation says: "With rising gas prices and challenges in the labor and housing markets, consumer spending has slowed and retailers have adjusted their inventory levels accordingly."
The inventory-to-sales ratios for manufactures and wholesalers have shown similar declines. This indicates that these supply chain members are not necessarily holding excess inventories for rapid delivery to retailers with low stock on hand, which is opposite to what the retailers are assuming.

The downside of having too little inventory on hand - a negative impact on revenue - was experienced by Wal-Mart when that retailer reduced inventory selections as a means of lessening inventory-holding costs and improving supply chain efficiency. Unfortunately, Wal-Marts sales performance suffered when customers found that their favorite brands were no longer stocked. Another potential problem associated with low inventories is the difficulty in dealing with supply-chain disruptions, such as the 2011 earthquake in Japan.
SharenTurney, the chief executive of Victoria's Secret, understands the need to weigh the benefits of minimizing inventory-holding costs against the possibility of lost sales. Turney says that Victoria's Secret is seeking a "balanced approach between managing the business with optimism and staying conservative on our inventory and expense plans."

In addition to lost sales, too little inventory is typically associated with the need for frequent ordering, the need for emergency shipments, high ordering costs, and less ability to receive quantity discounts. In contrast, too high an inventory is normally associated with high holding costs, the need for markdowns to clear out unsold inventory, and too much dated merchandise.
Questions

1. List five tactics that retailers can use to reduce their inventory levels while keeping the chance of stockouts low.

2. Discuss the supply-chain implications of retailers having low inventory-to-sales ratios if the inventory-to-sales ratios of manufactures and wholesalers are high.

3. What are the dangers of frequent small orders and the use of emergency shipments as a means of reducing inventory requirements?

4. How could Wal-Mart have foreseen and avoided the negative impact on revenues of pruning its merchandise selection?