The New Science of Retailing

Retailers have huge volumes of information at their disposal. But they're unsure of how to sort through it and use it to make smart decisions. They're struggling with profit-sapping supply chain problems. This book explains how to use analytics to better manage your inventory for faster turns, fewer discounted offerings, and fatter profit margins.

“the book is a practical guide to good inventory management, the reduction of markdowns, and the achievement of higher gross margins.” — Forbes

Auteur
Marshall Fisher is the UPS Professor of Operations and Information Management at the Wharton School of the University of Pennsylvania and codirector of the Fishman-Davidson Center for Service and Operations Management. Ananth Raman is UPS Foundation Professor of Business Administration at the Harvard Business School and specializes in supply chain management. They cofounded 4R Systems, Inc., which provides analytic services and software to retail supply chains.

Texte du rabat

Retailers today are drowning in data but lacking in insight. They have so much information at their disposal that they struggle with both how to sort through it, and how to add science to their decision-making process without blunting the art that they correctly believe is a key ingredient of their success.
This book reveals how retailers can use data to manage everything from strategic assortment planning, inventory management, and markdowns to improve store-level execution. This data-driven approach to the retail supply chain leads to far greater and faster inventory turns, far fewer and lower discounted goods and services, and better profit margins. The authors also tease out the personnel issues and the organizational implications of this approach.

Échantillon de lecture

Chapter 1

Retail Valuation: How Investors Value Product Availability and Inventory Management

For years we have heard from managers responsible for operations and supply chain management that they could not get their CEOs and other senior executives excited about operational issues. A common explanation for the CEOs’ lack of interest in operations was because operational issues did not seem to get attention from investors. Frequently, managers have complained to us that investors in their firms do not pay attention to operational metrics like inventory turns. Moreover, they also complain that quarterly pressure to meet short-term earnings precludes their firms from investing in longer leadtime operational-improvement projects, such as improving store operations and customer service. Clearly, investors’ inability or unwillingness to reward operational improvement or investment in operational improvement could be a barrier to implementing rocket-science in retailing.
The good news for managers seeking to improve operational capabilities is that the situation is changing now. In our experience, Wall Street – led by a few fund managers and analysts – is becoming increasingly savvier about evaluating operational performance and capabilities. For example, as we argue in this chapter, we see inventory becoming increasingly important to retailer valuation, and we have interacted with some investors who watch retailers’ inventory very closely for early signs of good or bad news. Such attention from investors is likely to translate to attention from senior executives within the company as well and could be a blessing for operations managers who have craved such attention for a long time. On the other hand, some other operating managers and retailers might be unprepared for this attention from senior executives and investors.
This chapter examines the relationship between retailers’ stock-market valuation and inventory management capabilities. The chapter first explores how inventory affects a retailer’s economics (and therefore should affect the retailer stock price) before looking closely at the inventory turns metric. It then identifies how the metric needs to be modified to control for the impact of other operational variables that are correlated with turns. Finally, we provide evidence that valuation is in fact a function of inventory performance once these other variables are controlled for or some missing performance metrics are revealed.

Inventory Management and Valuation
How should a retailer’s inventory level and inventory management capabilities affect its stock market valuation? A look at a typical retailer’s financial statements highlights the importance of inventory to retailer financial performance. Inventory is a significant portion of most retailers’ assets, and the cost of financing and warehousing inventory can be substantial relative to a retailer’s profit. Moreover, inventory has associated markdown and obsolescence costs and the lack of inventory when consumers want to purchase the product can also be expensive. Include the added bankruptcy risk that additional inventory imposes upon the retailer, and it would lead us to conclude that savvy investors and financial analysts should have a good understanding of the relationship between inventory and stock market valuation and incorporate this understanding in valuing retail companies. However, the relationship between a firm’s inventory management performance and its stock market valuation is not well understood and according to some industry observers often ignored even by otherwise careful investors. “Wall Street does not get it [the relationship between a retailer’s stock market valuation and its inventory level],” David Berman, a hedge-fund manager specializing in retail stocks who looks at inventory turns very closely . Numerous retail executives have echoed the sentiment too; some have even bemoaned the fact that the lack of Wall Street attention implies insufficient senior management attention to this problem. This, we argue, is likely to change soon – inventory management is going to be a vital piece of retailer valuation in the near future.
Inventory levels – on a retailer’s balance sheet -- do not get the weight that one would expect them to get in retailer valuation because investors lack appropriate metrics to reward a firm for managing its inventory well. Retailers should carry an optimum amount of inventory and deviations from this optimum in either direction can be expensive; too little inventory results in additional stockouts and poor customer service while too much inventory leads to additional financing, storage and obsolescence costs. It is hard for an observer external to the firm (such as a financial analyst or an investor) to identify the optimum inventory level for a retailer, let alone to know if a given retailer is at their optimum level. The commonly used metric for evaluating the appropriate level of inventory at a firm – namely, inventory turns – varies widely across even “similar” firms and over time for a single firm. Moreover, the nature of the variation is not well-understood. Consequently –in the absence of knowing the appropriate level of inventory-- it is difficult for investors to evaluate and hence, reward good inventory management performance. Moreover, recent academic research also shows that to reward good inventory management, investors will have to control for the effects of other operational variables (such as gross margins, service levels, and proportion of inventory that is obsolete), some of which can be obtained from public financial statements and others that become apparent only periodically. When investors are able either to control for some of these operational variables, such as gross margin, and when some of these other variables become known (e.g., when a firm marks down inventory), we notice a clear correlation between stock market valuation and inventory levels.…