Inventory management is one of the foundational pillars that underpin successful retail operations. Commonly, it could be explained as a process that ensures organizational capacity to carry merchandise required by the customer, while also balancing between the running out of stock or having an excess of supply (Jacobs & Chase, 2017). The choice of topic for the current research is explained by the personal interest of better understanding of retail sales patterns that lead to the lower costs and higher revenues, which are driven by the relevant inventory control systems.
The target companies chosen as a case study include H&M, Zara, Ikea, and Walmart, which use different approaches for inventory management control. Hence, the objective is to differentiate between existing control systems rather than suggest the best solution, arguing that various retail strategies require adaptive approach in choosing the appropriate inventory control.
The research focuses on exploration of four inventory management systems that can be used by the chosen retailers. The first is a price-break model, which determines the cost effectiveness of the quantity discounts based on the total variable costs, costs to hold, and purchase costs to quantify the revenues (Jacobs & Chase, 2017). The second is a single-period inventory model, which is based on the seasonality effect of ordering products during a specific period of time given that the quantity is measured against the value period of its necessity (Jacobs & Chase, 2017).
The third is the cost-per-touch model, where the final cost of the product is estimated by the number of ‘touches’, or involvement of intermediaries throughout the supply chain process (Clear Spider, 2018). Finally, the fourth is the inventory management cooperation model, which supposes that wholesalers share the inventory quotas with suppliers on the pre-aligned basis (Jacobs & Chase, 2017). The practical application of these models is further explained based on the target companies chosen to fulfil the research objectives.
Background and Method
The inventory control system used by H&M adheres to the principles of price economy with short lead times. In practice, it means that the company has to manage a huge supply network and warehousing needs, while also maintaining productive relationships with suppliers. It is noteworthy that the company hosts a team of about 100 designers, but does not own any factories for the clothing production. Realizing that it is essential to follow fashion trends, H&M has its retail inventory manufactured at 80% in advance, while the rest is presented based on the present-day market trends (Erply, 2020). Meanwhile, the affordability of the product is achieved based on the efficient supplier relationship strategies and manufacturing commitment, which helps to reduce lead times to delivery.
Unlike H&M, Zara uses an aggressive expansion strategy with almost 400 stores opened during the last 5 years focusing on the core eight brands (Erply, 2020). The brand recognition is primarily achieved by the ability to deliver new clothes fast and in small batches, which emphasizes on the quick inventory replenishment. Zara stores operate on the schedule of ordering clothes twice a week, which arrive at the arranged time as requested. The high delivery frequency is primarily attributed to in-house production, where the flexibility principles of the amount, frequency, and variety of products is met (Erply, 2020).
Furthermore, the in-house production helps to promptly react on new design trends, since Zara is capable of delivering new fashionable products in almost 2 weeks as the first prototype appears on the catwalks. Consequently, Zara majorly operates based on the seasonality trends, meaning that much of its products are designed and produced during the short period and adhere to the fashion trends dictated ‘right now’. However, for the peaking trends the company still reacts instantly based on accumulated design experience and available small stock of products.
IKEA is an example of the cost-per-touch inventory management model, which means that its supply chain from production to the customer is largely shortened and predisposes limited engagement of third parties. Specifically, customers are free to access the showroom that explains the process of product assembling and therefore proceed with the purchase and installation process on their own, which significantly decreases maintenance and operational control costs.
However, this strategy is underpinned by an additional in-store logistics management strategy of managing minimum and maximum settings for the reordering points realized through a stock replenishment process. Hence, it means that while customers are free to order the product at any time, the company manages associated costs by setting the minimum set of products available before reordering and maximum amount available for sale at specific time. It certainly has its constraints in terms of demand, while allows to carefully manage the supply under the condition of limited third-party engagement.
Similarly to IKEA, Walmart seeks to minimize links in its supply chain and optimizing purchasing to sales process more straightforwardly. However, the scope of Walmart’s operations is larger comparing to the other companies researched, which makes supply chain optimization process more complex. Nevertheless, the company uses multiple innovative approaches in its logistics operations. First, it relies on the recent technology solutions for inventory tracking and restocking shelves, which provides a cost saving opportunity.
Second, Walmart pioneered the cross-docking approach for inventory replenishment, which means that products are loaded from inbound to outbound tracks without the need of additional time-consuming storage in the warehouse (Erply, 2020). Finally, Walmart regularly works on optimizing the overall number of suppliers by choosing only strategic ones that could operate on the global scale, which reduces costs of cross-collaboration and overall inventor access procedure.
The analysis of company approaches in inventory management allows confirming that H&M follows the price-break model approach, Zara utilizes the single-period inventory model, IKEA follow the principles of cost-per-touch, while Walmart utilizes technology to practice inventory management cooperation. The use of price-break model by H&M is explained by the fact that the company does not have its own production facilities, which means that on cannot swiftly react towards immediate trend changes and therefore requires to control prices on market demand.
Alternatively, Zara has a capability of supplying fashionable trends faster than H&M because of having in-house manufacturing capabilities, while the use of a single-period inventory model is critical to ensure that the supply will not overwhelm demand in a short timeframe. IKEA benefits from its cost-per-touch approach by cutting the supply chain length and reducing complexity, while is vulnerable to the cases of high product demand. Finally, Walmart benefits from the innovativeness in technology and cross-decking approach, while might be vulnerable in terms of supplier control and selection if those do not comply with the associated technical requirement for executing operations.
Analysis of Potential Pitfalls
The chosen companies might have considered alternative solutions for optimizing their inventory management controls. However, it is worth admitting specific approaches that would rather not be implemented. First, even if the fixed order quantity approach is a feasible solution for the clothes retailing operations, it is not appropriate neither for H&M nor for Zara. H&M collaborates with multiple manufacturers at a time, which means that fixed order limit will create issues with keeping up the trend style and having faster lead delivery times. For Zara, fixed order quantity is inappropriate in terms of production scheduling, since in-house operations are flexible and will eventually consume more time if set on the product forecasting basis.
For IKEA, it could be eventually considered to have a single-period model being implemented based on the seasonality of furniture purchases related to making home repairs or Christmas bonuses, while this might eventually break the in-store logistics approach of the minimum reordering threshold. Finally, alternative inventory management configurations for the Walmart will require much time for transparent implementation given its versatile business operations, which is even more critical during pandemics times and uncertainty in managing consumer demands.
Following the initial thesis statement, there is no single option for retail companies to develop the optimal inventory management strategies, since one is closely related to existing business operations. However, it is important to explore underlying scenarios that lead companies to choose specific operational strategies through the use of technology solutions. For instance, the use of central inventory software management system appeared to be successful in elucidating the advantages of inventory control development for both H&M and Zara.
Similarly, technological solutions, such as open marketing and robotized production enabled IKEA to provide live demonstration of the product assembling and enable disruptive innovations in its supply chain. Finally, Walmart gain the major advantage of technology to carefully structure its highly versatile supply chain and enable the opportunity to decrease costs through logistics routes monitoring, cross-decking, and warehouse resource sharing. To some extent, these approaches are comparative; however, they are not uniformly compatible, since retail success of clothes, furniture, and grocery products depends on the different factors.
Furthermore, it is also complicated to provide a final proposal for the best inventory access control approach among initially introduced ones. Based on the success of Zara that fairly succeeded on the market faster than H&M, it is reasonable concluding that having own production facilities certainly bring advantage to the brand development and recognition, where the inventory is customized and produced based on the seasonality trends. However, this statement excludes the cost aspect of establishing those, as well as omits the operating cost concern if the company pursues global scale of operations.
Alternatively, the case of IKEA shows that in some situations it is critical having a reserve of product supplies rather than selling products directly to the customers and maintain strict quantity control, since the demand might overturn a supply and force customers to seek for the better available alternatives. Finally, the case of Walmart is noteworthy in terms of immediate savings through cross-docking, while it is not clear if this approach is justified for the case of wholesaler collaboration and their internal storage rules and strategies. Therefore, a primary methodological investigation is further required to enrich present findings.
Erply (2020). In the success stories of H&M, Zara, Ikea and Walmart, luck is not a key factor. Web.
Jacobs, F.R., & Chase, R. (2017). Operations and supply chain management (15th ed.). McGraw-Hill Education.
Clear Spider (2018). 3 ways IKEA aces inventory management (and you can too). Web.