After many prominent retailers have formally reported their financial results for the first quarter, business and industry media have been quick to note that for the most part, U.S. retailers are facing a glut of existing unsold inventory. The exception is certain online retailers such as Amazon who have managed to post continued sales gains and leverage the existing popularity of online shopping especially in categories such as apparel. However, retailers with a large physical retail store presence and who suffered significant revenue declines in Q1 are expected to deeply discount and promote the sales of excess inventories over the coming weeks.
While this is certainly some good news for avid shoppers, this quandary will have implications for the remainder of the year. A published report from Reuters quotes a retail industry equity analyst at Edward Jones as indicating that retailers are now in the process of cutting back inventory purchases for both the third, and the all-important fourth quarter of this year.
The stated risk is that without very comprehensive and purposeful inventory planning and supplier management, retailers run the risk of jeopardizing revenues and profits in the crucial holiday buying quarter that comes towards the end of this year. Those retailers who have invested in more advanced inventory optimization and management applications that integrate with item-level point-of-sale sales data may well get the benefit of successfully navigating through some difficult upcoming quarters.
The other obvious implication will be on global ocean container transportation, which continues to slog through its own crisis of too many ships chasing declining shipping volumes. With many traditional retailers cutting back on second-half inventory purchases, shipping volumes may well decline even further. That will bring added revenue and profitability pressures to some existing ocean container shipping, port operations and inter-modal railroad lines.
The current environment of global economic uncertainty and rapidly shifting shopper buying preferences continues, and retail focused supply chains, as always, are in the cross-hairs of scrutiny and required performance. Retail supply chains and their associated sales and operations planning teams will continue to learn lessons in responsive merchandising and more proactive inventory management while continuing to discover the increased costs of online fulfillment.
Yesterday, there was a significant development related to the bankruptcy proceedings involving sporting goods retailer Sports Authority, one with continued supplier collaboration and management implications for the broader retail and consumer goods industry sectors.
In early March, Supply Chain Matters called attention a report that retailer Sports Authority has filed for Chapter 11 bankruptcy protection which included an intent to close or sell 140 stores and two existing distribution centers. Characterized as one of the largest sporting-goods retailers, the chain found itself weighted down with debt from a prior leveraged buyout a decade ago. According to media reports, there was $1.1 billion in debt that included $717 million in bank loans and over $200 million in trade debt owed to suppliers. Lenders have given the retailer up to the end of April to find a buyer or another investor, or close any remaining stores.
A subsequent disturbing twist to this bankruptcy proceeding involved the categorization of existing consignment inventory. Attorneys for the retail chain filed lawsuits with more than 160 existing suppliers challenging claims to consigned inventories. According to reports, upwards of $85 million in shoes and other gear that were currently on the shelves in retail stores were at-stake. The supplier lawsuits were apparently a means to challenge who gets the bulk of compensation when consigned goods are sold in store closings or in discounted sales. Our Supply Chain Matters view was that the move on consignment inventory had significant ramifications for supplier collaboration practices within retail as well as other consumer goods focused supply chains.
Today, business reports indicate that this week, Sports Authority has abandoned its reorganization plan and instead will count on any potential buyers to salvage parts of the retail chain. A report in today’s editions of The Wall Street Journal indicated that the chain’s lawyers indicated to a bankruptcy judge that the existing debtors will not support reorganization and are instead enforcing an outright sale. A May 16 auction date has apparently been set for the bulk of the retail chain’s operations and facilities. According to today’s WSJ report, there are no guarantees that any of existing stores will stay in operation.
What caught our attention was the following sentence:
“The financing fight is also the arena for claims from some vendors that they, rather than lenders, have the right to collect the proceeds when goods are sold”
That obviously is a reference to attempt to seize proceeds from vendor consignment inventories. One could speculate that existing suppliers elected to play hardball, given what was on the table, and given that some other sporting goods retailers are financially struggling as-well. From our lens, it was indeed protecting the integrity of consignment inventory contracts.
Reports indicate that talks remain ongoing, and although a planned reorganization is off the table, a subsequent liquidation plan will have to address how any existing debt will be paid-up.
Our takeaway from this week’s Sports Authority development is a caution to other retailers to not mess with existing key suppliers who have extended a hand to help finance inventory investments. We continue to wonder aloud whether the Sports Authority developments, regardless of final outcome, provide a longer-term setback in joint inventory management practices.
Nikkei Asian Review, citing component supplier based sources, reports that Apple will continue to reduce production levels of iPhones for the April-June time period. The latest adjustment comes after forecast volumes were lowered in the January-March quarter.
According to the report, the continued slowdown stems from slowing sales of the iPhone 6s and iPhone 6s Plus models, while the recently announced iPhone SE does not have enough demand volume to offset volume declines of the former two models.
The implication will obviously be an impact on component suppliers of LCD displays, memory chips and image sensors who rely on the iPhone’s huge volumes for their own revenue and profitability expectations. The Nikkei report comes after an EBN report published in in early February indicating earlier cutbacks.
From our Supply Chain Matters lens, this news has broader implications. Other product areas such as the iPad continue to experience declining demand, while Apple has been very reluctant to disclose any volume numbers related to its Apple Watch products, which can be interpreted to mean either exceeding or declining expectations.
For the globe’s most admired product development and supply chain organization, the pressure for coming-up the next big market disruptive product has to enormous. It’s no secret that the iPhone product lineup is the soul of Apple’s ongoing healthy levels of profitability, and thus the beast needs to be fed a constant high-calorie diet. Thus as we enter mid-year, we can expect that something had better be churning on the product front since suppliers are obviously jittery.
Perhaps the speculation that Apple will enter the electric car business may be closer than we think, else, something else may be brewing on the acquisition screen.
This Editor was recently alerted to a blog posting penned by Anders Remneback appearing on The Innovators Solution blog hosted by supply chain planning software provider ToolsGroup. We are bringing this to the attention of our Supply Chain Matters readers because of its timeliness to the increasing complexity involved in planning an Omni-channel focused supply chain.
This posting, What’s wrong with ABC inventory classification?, explains why traditional ABC inventory planning process methodology, which is anchored in an operational or logistics planning perspective lacks a connection to customer fulfillment or sales and marketing needs. In this context, the author helps the reader to differentiate what is often termed to be “inventory management” vs. “inventory optimization.”
Inventory optimization techniques allow the flexibility in the use of what is termed “service classes” which in essence are customer fulfillment service needs. Inventory optimization techniques in essence, calculate “stock-to- service” curves, optimizing individual service and safety stock levels to an SKU location. As noted by the author:
“The inventory optimization software automatically calculates a service level for every SKU-Location that aggregates to the total service level target for the overall service class, achieving “service level optimization“.”
This argument is especially pertinent to producers of consumer focused goods which are increasingly being planned for Omni-channel fulfillment. As we have pointed out to readers, online Omni-channel needs are driving a new wave of SKU (item level) proliferation explosion because of the needs of various fulfillment channels. Trying to plan such landscapes with traditional ABC inventory management techniques is sub-optimal and inefficient in terms of overall inventory management. This is especially pertinent for retailers attempting to fulfill customer needs from a centralized inventory management approach, one that balances inventory needs for both traditional brick-and-mortar retail as well as online channel needs.
Once more, with today’s increasing advancements and cost efficiencies in in-memory and database streaming technologies, multi-echelon inventory optimization technology can be far more affordable from certain software vendors and is increasingly being integrated into supply chain planning application suites.
A final observation to share is the following. Many supply chain organizations that adopted supply chain planning software in the past opted to deploy heuristics vs. full optimization techniques. At the time, the reasons were perhaps justified in terms of supply chain profile, overall size of planning data to be managed along with technology skills adaptability at the time. Many organizations felt that heuristics based planning techniques would be more supportive of more response based planning processes, those which adopt a continuous net-change planning approach.
This author is of the view that such practices should be re-examined, especially in the light of multi-echelon inventory optimization vs. generalized inventory management and replenishment. The new world of Omni-channel fulfillment brings its own set of customer fulfillment service goal attainment, overall inventory investment and gross margin goals for any line-of-business. Generalized planning without the use of targeted optimization coupled with more predictive analytics simply will not suffice in Omni-channel fulfillment.
Earlier this month we alerted Supply Chain Matters readers to the unfortunate filing of bankruptcy by retailer Sports Authority. Characterized as one of the largest sporting-goods retailers, the chain has been weighted down with debt from a prior leveraged buyout a decade ago. Today, business media has added a more disturbing development to this ongoing bankruptcy process, one that by our lens has significant ramifications for supplier collaboration practices within retail as well as other consumer goods focused supply chains.
In its bankruptcy filing, Sports Authority indicated $1.1 billion in debt that included $717 million in bank loans and over $200 million in trade debt owed to suppliers. As is a common practice in retail supply chains, suppliers had consigned inventory to this retailer, expecting payment when the goods were sold to consumers.
This week, the retail chain filed lawsuits with more than 160 of these suppliers challenging supplier claims to consigned inventories. According to a published report from The Wall Street Journal, upwards of $85 million in shoes and other gear that are currently on the shelves in retail stores and are at-stake. The supplier lawsuits are apparently a means to challenge who gets the bulk of compensation when consigned goods are sold in store closings or in discounted sales. According to this report, Sports Authority is owned by a private equity group as well as a consortium of banks that are apparently seeking to test defects in inventory consignment agreements.
Suppliers themselves have demanded that the retail chain stop selling these consigned goods because of their belief that they hold ownership to the inventory. Accordingly, lawyers for the retailer are invoking what they believe are unique powers defined under bankruptcy laws.
Yesterday, a court ruling from a judge instructed Sports Authority to comply with supplier demands to return the consignment inventory and reinstate arrangements that existed before bankruptcy filing. Lawyers for Sports Authority apparently are willing to comply with the judicial decision but also continue with the supplier lawsuits as a means to reclaim the monies later if their lawsuits are successful.
While we are not lawyers nor profess to interpret laws, this development struck a nerve within our supply chain management lens, thus we are alerting our readers to this development.
As our industry supply chain readers are well aware, consignment inventory or vendor managed inventory (VMI) practices are fairly common practice in consumer goods focused and other select industry supply chains. They were designed as a response by suppliers to assist key customers in their inventory and cost-of-goods sold (COGS) financial objectives. In essence, suppliers holding inventory ownership until goods are sold is a means of lower cost inventory financing for the buyer. Challenging such practices under the umbrella of bankruptcy protection is an ominous sign, one that if successful, will by our view, reverberate across multiple supply chains and muddle inventory ownership practices. Further, it represents a new low by private equity firms in challenging successful established business practices for singular gain. It literally challenges the notions of win-win supplier collaboration practices.
How all of these developments turn out is a matter of time and interpretation by courts. However, we wonder aloud whether this effort, regardless of final outcome, provides a longer-term setback in joint inventory management practices.
We welcome the views of our readers either through comments associated to this commentary or by direct email.
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