Retailers Rethink Inventory Strategies
June 27 2016 - 5:47PM
Dow Jones News
By Paul Ziobro
CONROE, Texas -- Home Depot Inc. is bringing a new philosophy to
its cavernous stores: Less is more.
Instead of filling its warehouse-style racks to the ceiling with
Makita drills, rolls of Owens Corning insulation and cans of
Rust-Oleum paint, Home Depot wants fewer items on its shelves and
it wants them to be within customers' reach.
"Get comfortable with days of inventory, not weeks," Tom Shortt,
Home Depot's senior vice president of supply chain, says is the
message going out to stores. The retailer is targeting sales growth
of nearly 15% by 2018, but wants to keep inventory levels flat or
slightly down.
It is a shift happening across the retail sector as companies
try to figure out ways to profitably serve the growing needs of
online shoppers while making their network of stores less of a
financial burden. Chains must predict whether demand will come from
the internet or a store visit, and whether they'll ship online
orders from a distribution center or a store. Every move of
inventory is an added cost that eats away at already thin
margins.
Online shopping "has forced the industry to rethink not only the
math and science behind the inventory pool, but also the strategy,"
said Scott Fenwick, a senior director at Manhattan Associates Inc.,
which makes supply-chain software.
Wal-Mart Stores Inc. and Target Corp. are cutting back on the
number of packs of diapers, boxes of cereal, and bottles of laundry
detergent in their backrooms, and moving the product to shelves
faster. Wal-Mart has also widened aisles to further reduce the
amount of goods on its shelves, while Target has moved bulky items
such as patio furniture into centralized distribution locations
instead of keeping them in stores. Kohl's Corp. is aiming to lower
inventory by 10% by the end of next year, after seeing it swell 15%
over the past five years as the department-store chain tried to
become a bigger online player.
In the first quarter, Wal-Mart's inventory rose slower than
sales, helping to improve gross profit margins. "It's like oxygen
in the store, " Wal-Mart CEO Doug McMillon said at the company's
annual meeting last month. "The weight of inventory has been
relieved to an extent. And I think that bodes well for the
future."
Inventory is one of retailers' highest costs. Any reduction in
the level of capital tied up in unsold goods frees up resources to
invest elsewhere, such as building out online operations or
covering wage increases. But destocking isn't without risk. Bare
shelves are a major annoyance to shoppers who take the time to go
into stores to shop.
"If I hold too much inventory out of the stores, then it looks
like I'm out of business," says Rodney Sides, vice chairman of the
retail practice at Deloitte LLP.
When many chains first started selling online, they set up
distribution centers to service their e-commerce operations. But
that ran the risk of doubling inventory. Then they tried to make
their stores double as online fulfillment centers and merged the
systems that manage their online and store inventory pools. While
that helps lower shipping costs by storing products closer to
customers, it means more work for store employees.
"Ideally, you put less inventory in the stores, but replenish
more frequently," said Brian Gibson, a supply-chain professor at
Auburn University. "You'd rather fulfill based on demand than based
on a forecast."
Home Depot has weathered the shift to online shopping habits
better than most, with sales at existing stores up at least 5% in
each of the past three years -- helped by the continuing rebound in
the housing market. Still, its push to lighten inventory levels
will be a challenge, especially as it seeks to increase annual
revenue to $101 billion in 2018 -- $12.5 billion higher than last
year -- without opening more U.S. stores.
To tackle the issue, Home Depot is overhauling a big part of its
brick-and-mortar supply chain. It's instituted "Project Sync," a
series of changes that include developing a steadier flow of
deliveries from suppliers into its network of 18 sorting centers.
Instead of being slammed with five trucks twice a week, for
instance, Home Depot now wants to have suppliers send two trucks
five days a week.
The savings from the synchronized inventory flow are a key part
of getting Home Depot's operating margin up to 14.5% by 2018, from
the current 13%, and also boosting the return on invested capital,
a closely watched industry metric. The more frequent deliveries
also help improve in-stock levels, even as Home Depot tries to keep
a lid on inventory growth.
When the shipments get to stores, workers move them right to the
lower shelves, eliminating the need to store and retrieve products
from upper shelves using ladders and forklifts. Those activities
are some of the most expensive parts of the supply chain, Home
Depot executives say. Savings can be used to have more workers on
the floor or finding orders for shoppers who are picking them
up.
This also keeps stock from collecting dust out of reach. "You
would stack it high," says Jessica Thibodeaux, manager of a Home
Depot just outside Houston, "but it wouldn't fly."
Write to Paul Ziobro at Paul.Ziobro@wsj.com
(END) Dow Jones Newswires
June 27, 2016 17:32 ET (21:32 GMT)
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