Retail management aims at promoting sales and ensuring customer satisfaction. It encompasses various tasks and requires a qualitative and effective managerial activity as a critical factor of a retailer’s success. Procedures like storing and monitoring inventory, counting items, and forecasting demand can improve a company’s capacity to make sales. According to Berman et al. (2018), one of the merchandise manager’s primary tasks is to develop and realize the right inventory strategy. While some retailers find excess inventory risky as it can cause substantial markdowns, others believe that having insufficient stock can prevent them from making a sale. This paper aims to discuss two inventory strategies and examine the risks of having too much and too little merchandise for retailers.
Two Views on Merchandise Planning
A case study on merchandise planning presents two opposing views that are based on different arguments. To define the effectiveness of each approach, it is crucial to consider factors a retailer needs to keep in mind when developing a functional strategy for the company. The considerations include innovativeness, forecasts, allocation, timing, assortment, and brands (Berman et al., 2018). In this regard, retailers that do not stock excess merchandise largely depend on forecasts and innovativeness since they need to predict demand and keep their stock fresh to attract customers. At the same time, those who avoid having empty shelves should rely mostly on brands and timing as they need to ensure customers’ interest and high sales rates to avoid adverse seasonality effects. As Wako (2018) states, the scope of inventory management is so vast that apart from merchandise control and replenishment, it also comprises tasks like defective goods returns, future price forecasting, and asset management. It is no doubt that every merchant needs consideration of all factors, but different strategies shift the primary focus to different aspects.
As to the debate on the amount of merchandise, I believe that a balanced planning strategy is needed for a company to achieve its goals. However, if I were to choose one, I would follow the principle “buy less, make more.” The optimal inventory level is based on the company’s capacity to make sales and react to the environment. In this context, both Stu and Karen from the case recommend considering the customer’s needs. While Karen warns against reducing stock levels and recommends always to have exciting products available, Stu suggests the principle of smaller amounts of quality goods. I find the strategy of “buying less” more appealing as it corresponds to the market’s current changeable situation. In the era of sustainable development and conscious consumption, it seems reasonable not to plan too far in advance to avoid overstocking with outdated, unpopular, or seasonal products that will not sell. Even though some sales will be missed because of having less inventory, this approach is not as detrimental as unsold items that have already involved expenses.
Risks of Overstocking
Many experts caution retailers against overstocking and risks attributed to it, and significant markdowns are only one of them. Companies that stock too much are likely not to sell all the styles which are not trendy anymore. In other words, part of their merchandise loses its liquidity. Apart from opting for the price reduction, there is no other way to compensate for failed sales losses. However, marking prices down does not guarantee sales and still implies a risk for the company’s product and distribution costs. The “you can’t be a merchant without merchandise” principle suggests that a retailer should buy enough products to impress and attract customers. However, poor planning and forecasting can lead to obsolescence of inventory, which is especially unfavorable for technology-oriented retailers (Berman et al., 2018). For instance, the maintenance of outdated products is complicated and sometimes unavailable, and excess inventory of this kind will lead to losses in a company. Another drawback of overstocking is taking up too much space at warehouses and in storage rooms and time during inventory checks. Overall, many companies understand the risks of excess inventory and find ways to avoid them.
At the same time, some companies believe in the philosophy of stocking a sufficient amount of inventory. Amazon is an example as it aims at providing excellent customer service, and all its policies correspond to this principle. As an online department store, the company holds sufficient inventory since it needs to keep regular production and supply chain flow (Wang, 2020). Nevertheless, Amazon plans carefully on the inventory level it should carry and searches for ways to avoid or decrease overstocking (Berman et al., 2018). An effective merchandise management process is fundamental to the company’s success.
Risks of Understocking
Having too little inventory also implies significant risks for a retailer. Losing a sale is one of the most apparent adverse consequences of insufficient stock and the worst in the retail context. It is always easier to retain a loyal customer than to attract a new one, and understocking is a factor that is likely to cause dissatisfaction in some buyers. A frequent inability to meet the customer’s needs damages the retailer’s reputation (Wang, 2020). Besides, a retailer that does not stock enough can miss out on favorable prices and discounts on those materials or finished products whose prices tend to increase with time. Associated inventory risk is shipping expenses that can be less for infrequent large orders than frequent small ones. In this regard, the “buy less, make more” strategy suggests making a lower number of valuable goods available for clients. The approach aims to attract buyers with a fresh flow of limited merchandise. However, not all customers will tolerate the absence of products, and it is in the retailer’s best interest to develop an efficient strategy and provide not excessive but sufficient inventory.
A company that shares the idea of being cautious with overstocking is Apple. Being a manufacturer brand, it anticipates the demand for its innovations and products and adapts its merchandise to the latest technology trends. Apple massively relies on its effectively developed supply chain management (Lockamy III, 2017). The company purchases components and raw materials from different suppliers, and once products are made, they are shipped to buyers. The strategy applied by Amazon aims to avoid the risk of missing out on favorable prices or discounts and reduce shipping expenses.
To sum up, two opposite inventory strategies and associated risks of having excess or insufficient inventory for retailers are discussed in this paper. To provide attractive offers, a company needs smart inventory planning, which involves the right amount of merchandise available at the right moment. Maintaining the optimal merchandise level is an ongoing process and requires constant control. The principal task for a retailer is to weigh the risks, consider the environment, and choose the strategy that will correspond to the company’s goals.
Berman, B., Evans, J. R., & Chatterjee, P. (2018). Retail management: A strategic approach. (13th ed.). Pearson.
Lockamy III, A. (2017) An examination of external risk factors in Apple Inc.’s supply chain. Supply Chain Forum: An International Journal, 18(3), 177–188.
Wako, E. (2018). Assessment of inventory management practice: The case of Hawasa Textile Factory, Ethiopia. Journal of Supply Chain Management System, 7(1), 1–8.
Wang, B., Wang, H., Yin, D., & Yu, X. (2020). Unionization and firm inventory management: Empirical evidence. Review of Business, 40(2), 53–74.