Posted Date: 12/4/2012

Holiday Inventory: The Purchasing Dilemma

By Chandler Hall, BravoSolution
The holiday purchasing dilemma is here: What's worse — having too much inventory on hand — which languishes if not sold in time — or not having enough product and coming up short during the most crucial sales season of the year? This question will plague inventory managers all season long.

Right now, according to recent Department of Commerce reports, manufacturers and wholesalers are more fearful of having too much inventory than not enough. The reports also show a positive increase in wholesaler inventory and retail sales and future projections.

If sales continue to substantially outpace inventory numbers it could lead to a holiday crunch. Consider the following:

• Sales for wholesalers jumped by 0.9 percent in August to $405.43 billion, the highest gain since February.
• U.S. wholesalers' inventories increased by 0.5 percent from the prior month to a seasonally adjusted $487.53 billion.

With the holiday shopping season upon us, the industry could see lots of demand but empty shelves.

Apparel companies shaping demand
The holidays are the biggest season for sales and the industry has become more aggressive than ever. The best supply chain strategy: align demand with production capacity (styles, fabrics, patterns).

Yet early demand has manufacturers depleting their already light inventories earlier than expected. Carrying two months of inventory is the norm, but manufacturers are currently running closer to one month's worth of supply. This leaves procurement teams with little room to be flexible for volatile holiday demand.

Unpredictable financial markets inspire fear
A major issue forcing retailers' hands is the looming concern of a year-end fiscal cliff. With continued uncertainty around the recession and volatile long-term consumer appetites, particularly for higher-end apparel goods, many manufacturers now operate with a more risk-averse posture.

Without a great deal of economic optimism, apparel manufacturers are playing it safe by:

• Keeping more cash on hand than normal
• Running tighter supply chains
• Keeping inventory as lean as possible

While this strategy makes sense to wholesalers and manufacturers who've either been burned or seen competition go out of business during the recession, it's incompatible with the retail and sales dilemma.

Instead of a the "dead inventory" dilemma, the new risk now becomes "lean inventories that hurt sales."

The bottom line
The forecast: If wholesalers and manufacturers respond too late and retailers are effective at shaping demand (particularly early in the season), items won't last long on the shelves — and new orders won't make it to stores on time. The hot holiday gift this year may well be an IOU in pretty wrapping paper.

If demand rises earlier than what the manufacturers are accustomed to, a new wrinkle to receipt of goods comes into play: shipping capacity becomes limited. Companies won't have the time to deal with congested transportation networks and the end result could be a poor performing holiday season, coupled with excess inventory after the season. At least the IOUs can be satisfied.

Shifts must be monitored; collaboration is critical
There's been a major shift in business philosophy following the economic crisis: profit margin over top-line growth.

Now, as the winds change, retail and manufacturing are split when it comes to placing their purchasing wager — the result could end up hurting both parties if they don't coordinate and collaborate better.

Chandler Hall, is vice president, collaborative sourcing for BravoSolution, which provides supply management services.