How the Big Guys Boost Inventory Cash Returns by Stocking Less

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Posted by: briansittley Comments: 0 0 Post Date: July 28, 2016

costA recent article by the Wall Street Journal’s Paul Ziobro (6-28-18) highlights the ways that big companies like retailers Home Depot, Wal-Mart and Target are cutting back on inventory to boost the percentage of cash they get back from the amount they invest in inventory.
“Get comfortable with days of inventory, not weeks,” said Tom Shortt, Home Depot’s Sr. VP of Supply Chain.  While targeting significant sales growth of 15% by 2018, Shortt plans to keep inventory levels flat or even slightly down.  And it’s happening across the retail sector, in many cases due to the competitive challenge of ascending growth in online sales.
Increasingly, these large chains must predict whether demand will come from the internet or a store visit, and plan their inventory locations and shipments in consolidated accordance, that is, whether from a store or from a distribution center.   Companies and supply chain software providers are being forced to rethink “the science, the math and the strategy behind the inventory pool,” notes Scott Fenwick of Manhattan Associates, a software (WMS) provider.
The retail chain Kohl’s, for example, plans to cut inventory by 10% by 2018, after seeing it grow 15% over the past five years.  At Wal-Mart “inventory rose slower than sales, helping to improve gross profit margins,” notes the Journal’s Ziobro.  Wal-Mart’s CEO called this effect “like oxygen in the store… the weight of inventory has been relieved to an extent.  And I think that bodes well for the future.”
Inventory, it’s well known, is a major cost, whether you’re a retailer, manufacturer or distributor.  Any reduction in capital tied up in unsold goods frees up resources to invest elsewhere – from beefing up your online presence to increasing wages or opening new locations.  Thus, improved inventory turns or reduced stocking levels have a direct benefit to the bottom line, as well as to any growth strategies a company may be considering.
So today companies seek to put less inventory in the stores and replenish more frequently.  They’re looking to fulfill based on demand rather than on a forecast.
But it’s a fine line, of course.  Carry too little inventory and you risk having the shelves look bare or even being out of stock and thus annoying customers who took the time to visit your store.  But too much inventory costs more cash than is prudent.  Hence the goal of putting in less and replenishing more frequently.  As an example, Home Depot’s “Project Synch” includes changes that provide a steadier flow of deliveries to its 18 sorting centers.  “Instead of being slammed with five trucks twice a week… Home Depot now wants… two trucks five days a week.”
These kinds of savings add up.  Home Depot expects to raise operating margins from today’s 13% to 14.5% by 2018, while boosting return on invested capital.  This also helps improve in-stock levels even as they keep a lid on inventory growth.  (No word on the effect on its (often much smaller) suppliers, we might note.)
When inventory arrives at stores, the Journal reports, workers move them directly to lower shelves, eliminating the need to store and retrieve products from upper shelves using ladders and forklifts.  The savings allows them to employ more workers on the floor, and keeps stock from collecting dust up high.
All of which only goes to prove that for even the biggest operations, inventory management and improvement is a never-ending quest for perfection, an increasingly exacting science and a key focus of any modern company seeking to continually reduce one of its largest ongoing costs.
For the little guys to compete, therefore, requires all the diligence, attention and inventory automation they can muster.

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