Question

Complete the following questions from the required Economics for Managers textbook:

In an industry where the goal is rapid turnaround of merchandise, J.C. Penney stores now hold almost no extra inventory of house-brand shirts. Less than a decade ago, Penney would have stored thousands of them in warehouses across the U.S., tying up capital and slowly going out of style.
The entire program is designed and operated by TAL Apparel Ltd., a closely held Hong Kong shirt maker. TAL collects point-of-sale data for Penney’s shirts directly from its stores in North America for analysis through a computer model it designed. The Hong Kong company then decides how many shirts to make, and in what styles, colors, and sizes. The manufacturer sends the shirts directly to each Penney store, bypassing the retailer’s warehouses and corporate decision makers.

1. Discuss how this case illustrates the concept of the opportunity cost of capital.
2. How does this innovation also help in demand management?

Answer 1

1) The capital locked away as inventory cannot be invested in the market for capital gains . This forgoing of incremental capital gains is termed as opportunity cost of capital . When Penny stored thousands of shirts in warehouses across US it used to block some amount of capital in their real value ( that is shirt ) . The nominal value of these stored shirts if invested , could have earned interest or profits . Hence , giving the responsibility to TAL would require analysis of this opportunity cost . If TAL charges less than the opportunity cost of capital then it is profitable to take the services .

2) Demand management refers to prediction of consumer demand with some precision . Here , consumer demand has to be analysed in such a way so that minimum extra inventory of shirts is created since shirts are garments which once out of fashion is not prefered by consumers any more . The analysis made by TAL through its computer model by collecting point of sales data helps to predict sale volume to some extent . The demand management is based on elasticity of demand , consumer preference , previous data of sales .