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OM in the News: Department Stores Keeping a Tight Lid on Inventory This Year

November 13, 2017

“With foot traffic at their stores in decline, department stores that would have stocked up for the biggest shopping season of the year months ago are still in the process of placing new orders,” writes Supply & Demand Chain Executive (Nov. 8, 2017). The strategy is aimed to keep their inventory costs down and avoid the experience of previous holiday seasons, when large piles of unsold stock led to deep markdowns that eroded profits. But these retailers risk losing sales if supplies run out at a time when many are struggling to keep up with Amazon and the shift towards online shopping.

Macy’s, J.C Penney, Kohl’s, Nordstrom, Dillard’s, Lord & Taylor are among the retailers buying in smaller batches with shorter lead times this year and relying on a more dynamic demand forecasting process than in the past. Keeping inventory levels low helps manage costs, and may also instill urgency in consumers to spend now rather than hold off on purchases in search of a better deal. But it also risks alienating customers who may end up having less choice, and is also putting strain on vendors to deliver on shorter lead times.

The high-stakes strategy takes a page from the playbook of  Zara, H&M, and other “fast fashion” retailers that consistently keep low inventories of trendy clothes and try to win customers with cheap prices. Traditionally, retailers lock in most of their purchases 9-12 months in advance. This year, retailers started placing a large portion of their holiday orders 3-4 months before the holiday season, and are refreshing fast-selling items within as little as 6-8 weeks.

The risk: Department stores rely on vendors whose traditional supply chains are not built for a fast turnaround, because they handle orders for several brands. Fast-fashion chains, on the other hand, have designed their supply chain to shift on a week to week basis and work with vendors who can deliver quickly on private label items they stock. So far this year, retailers have been willing to sacrifice some orders for tighter inventory management and higher margins.

Classroom discussion questions:

  1. What are the advantages and disadvantages of the smaller batch approach?
  2. What strategy do fast fashion retailers use?
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