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OM in the News: J.C. Penny Loses Control of its Inventory

November 22, 2013

pennyShoppers are buying more at J.C.Penny after a disastrous overhaul under former CEO Ron Johnson, who drove customers away when he did away with promotions and eliminated in-house brands. But the problem is that customers are also stealing more, reports The Wall Street Journal (Nov.21, 2013). As the chain is learning, its extensive inventory makes inventory management crucial. We note in Chapter 12 the importance of controlling pilferage through RFID and bar codes.

Theft spiked last quarter after Penny removed sensor security tags from merchandise while it shifted to a new inventory-tracking system that uses radio tags. Shoplifting took a full percentage point off  Penny’s profit margins. That was just one more weight that dragged the 1,100-store chain down to a loss of half a billion dollars. The need to liquidate old inventory did further damage to profits.

The shoplifting. Penney unveiled plans in 2012 to add RFID tags to every item in its stores. The tags are more expensive than traditional bar codes, but they promise to make it easier to manage inventory. Sensor tags designed to prevent theft were removed from merchandise, because they would have interfered with the radio frequency. At the same time, Penney had switched to a friendlier return policy that did not require customers to present a receipt. The combination gave people the opportunity to grab armloads of merchandise off store shelves, walk over to a cash register and return the goods on the spot. New CEO Mike Ullman says “the move away from sensors actually encouraged thieves to come to Penney. Competitors were still using the devices, so most of the theft comes to our place.”

The company is now retagging items on the sales floors with sensors, as well as tagging those that it is bringing in. It also recently tightened its return policy by giving store credit, rather than a refund, to customers who return goods without a receipt and are unable to produce the credit card used for purchase.

Classroom discussion questions:

1. What else can Penny do to eliminate pilferage?

2. Why is inventory control crucial is service industries like retailers?

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