In any economy, inventory management must strike a balance between costs and cutting into sales.
Keep stockpiles too large, and a company incurs added inventory carrying costs and the possibility of profit-sapping markdowns. Keep inventories too lean, and a company may leave money on the table in the form of lost sales.
Wal-Mart, the world’s largest retailer, was reminded of this last year when the company aggressively culled inventories and reduced stock-keeping units to lower costs and improve supply chain efficiency. When customers couldn’t find familiar brands, sales suffered.
The company quickly changed course by restoring products to its shelves. Inventory at Wal-Mart’s U.S. stores was up 6.3 percent in the first quarter over a year earlier. About 1 percentage point of the increase was due to inflation and another percentage point resulted from “higher in-transit inventory as we expand our global sourcing initiatives,” said William Simon, CEO of Wal-Mart’s U.S. unit.
Wal-Mart’s Sam’s Warehouse unit reported a 10.6 percent year-over-year increase, including fuel, in its first quarter inventory levels, but said it expects the increase to slow to single-digit levels in the second quarter.
In recent meetings with analysts, other publicly traded companies have said they recognize the need to keep customers happy, but emphasized their intention to hold down inventory costs.
Sharen Turney, CEO of Limited Brands’ Victoria’s Secret unit, said her company is seeking a “balanced approach between managing the business with optimism and staying conservative on our inventory and expense plans.