Question

the retailer JC Penney, and how they are trying to implement a strategy to reduce their inventory at their stores. Inventory last quarter rose 2.6%, and sales numbers were reported low. JC Penney has attempted to combat this problem by hiring a Senior Vice President of Planning and Allocation and Pricing. At the end of the previous quarter, inventory levels were reported at 2.9 billion dollars. Some of the causes of this large inventory was an addition of floor samples for appliance and mattress departments, and additional sizes in clothing assortments. Store sales for the quarter only increased by 0.2%, when they were projected to have increased by 2.1%. Industry specialists say that retail stores face the difficulty of inventory management because the stores need to carry a wide variety of products and sizes to draw in all sorts of customers, and the online competition from companies like Amazon are threats. Especially with fashion trends moving fast, the inventory management in retail stores has proved challenging. Total revenue for JC Penney has decreased 4.1% for the quarter, and a loss of 78 million dollars was reported.

I need help with the following Questions:

1) What are the financial consequences of having too much inventory on hand? What conclusions can be drawn from a company with too much excess inventory?

2) What are some inventory strategies that a company can use to keep their inventory levels at a desirable level?

Link to article: https://blogs.wsj.com/cfo/2018/05/18/j-c-penney-aims-to-trim-growing-inventory-at-comparable-stores/

Answer 1

Overstocking can lead to:

1. High costs of storage and maintenance
2. High insurance costs
3. Possible need for security measures
4. Large amount of space needed
5. Money is tied up in stock which could be used elsewhere
6. Stock may deteriorate or become obsolete
7. Safe disposal incurs extra cost

Stock Level Optimization

With excess inventory now identified through item analysis, the stock level optimization process can begin. After all, the last thing you want at this stage is to continue overstocking inventory due to inaccurate and outdated minimum/maximum or reorder-point/reorder-quantity (ROP/ROQ) levels. Using a complex formula, which considers variables such as criticality, issue quantity, issue frequency, average lead time, etc., optimal minimum/maximum levels can be calculated to minimize on-hand inventory while safeguarding against future stock outs and unplanned equipment downtime.

Inventory Disposition

So it's time to generate some cash flow and free up valuable warehouse space that is currently occupied by excess and obsolete inventory. There are several strategies for disposing of inventory based on timeline, desired payback and available resources. Here are a few of the common disposition strategies that produce quick success and great returns:

Vendor buy-backs

Third-party liquidation

Auction

Corporate internal redeployment/depletion

E-commerce (eBay, Amazon, etc.)

Of the above-mentioned strategies, third-party liquidation often provides the quickest and easiest success for companies, as it requires few resources, payment is immediate, and inventory is removed from the site within a short period of time. The downfall to this strategy is that it may not provide the payback for which you were hoping. In many cases, third-party liquidation will deliver 10 to 30 cents on the dollar, which for some organizations is simply a bonus just to get the unused inventory off their shelves. However, if you're looking for larger returns, you may want to consider an e-commerce solution or discuss vendor buy-back opportunities when negotiating your next supply contract.

Spending Analysis

Perhaps one of the most critical phases in the overall inventory optimization program, a spending analysis is performed to identify how much money is being spent, with whom it is being spent and on what it is being spent. With a consistently cleansed item master now enabling detailed visibility at the SKU level, the results of a spending analysis can be quite eye-opening for the procurement team. It is often at this point that procurement managers realize they have only leveraged a portion of their actual spending while missing out on several cost -savings opportunities along the way. Based on vendor name, last price paid, issue frequency, issue quantity and additional analytics, a successful spending analysis should reveal the following statistics:

Total number of vendors

Number of vendors per product group

Dollars spent per vendor

Dollars spent per product group

Dollars spent with preferred vendor(s)

Maverick purchases

OEM purchases

Price variances between OEM and MRO items

Price variances through a preferred vendor

Price variance between preferred and non-preferred vendors

No matter how staggering the results may be, these data-driven statistics will become the foundation for leveraging spending and achieving cost savings during the strategic sourcing and negotiation phase of the procurement process.

Strategic Sourcing

Now we're getting down to the fun part, strategic sourcing and negotiating. It's often surprising just how many companies have never tendered their MRO spending or have only focused on a small portion of it, especially considering the competitive nature of the industrial distribution space and multitude of cost-savings opportunities that are available. With accurate spending analysis reports now available at your fingertips, it's time to create an RFx to identify and select the best-suited vendor(s).

Once again, the RFx process can be performed by internal resources or through a third-party service provider. In either case, be sure to leverage your spending analysis reports and provide a quality market basket to obtain the most accurate product quote. Keep in mind that price isn't the only factor to consider during an RFx. While it may be one of the most heavily weighted components of your RFx, other factors such as lead time, availability, terms and conditions, guaranteed cost savings, and special incentives should also be taken into great consideration. Remember, if you have important requirements that are non-negotiable, make them known to bidders and don't just ask — demand them. The better you outline your requirements within the RFx, the more likely capable bidders are to meet them.

Once you've narrowed it down to a short list of vendors, the real negotiations begin. Be creative with the things you want, firm with the things you need and know when it's time to walk away. Chances are you'll be entering into a long-term contract, so it is important that the final agreement be mutually beneficial to all parties.

Compliance

Compliance is the last remaining piece of the puzzle to ensure ongoing procurement success and maximum operational efficiency. Traditionally, strategic sourcing and compliance has been based on preferred vendor programs and lenient purchasing procedures, which as we know, were driven by poor data. Too often buyers disregard preferred vendor programs with no repercussions just so they can buy from the local supplier with whom they have an existing relationship. Nowadays, as competition becomes stronger, budgets continue to shrink and technology advancements are a daily occurrence, companies must tighten up their processes to ensure that every dollar is spent wisely. How you ask? The answer is in this article, yet everything you've read thus far means nothing if it is not enforced down to the finest detail and end users do not comply with the cost-savings programs that have been negotiated.

Let's be honest, there's no point in establishing a preferred vendor program if you're not going to honor the contract. The key is not only to enforce compliance at a high product group level through the preferred vendor, but also down to the individual SKU level (by manufacturer). With outsourcing and contract work now trending throughout industry, third-party procurement companies are often a great solution to manage purchasing and compliance. If you choose to use internal resources, you may want to consider a software solution, which will force users to purchase only from preferred vendors.

Of course, there are exceptions such as catastrophic breakdowns and part unavailability through the preferred vendor, in which case the user must specify a reason as to why the part is being purchased from a non-preferred vendor. If nothing else, this process instills ownership and accountability, as end users are aware that upper management is monitoring their purchasing habits.