Executive Briefings

That's the Old Way of Retailing. Forget It.

With the U.S. consumer price index up 5 percent for the year ending June 30 and unemployment currently at 5.7 percent, many retailers have found themselves in a tough situation, locked between rising product costs and a limited ability to raise their prices. Even cost-savvy market leaders such as Costco are having a difficult time. But Wharton faculty say that handled carefully, the current inflationary period may actually be a business opportunity for some retailers, especially if they make selective changes in inventory management, pricing and promotions.
That new thinking can begin with inventory. According to Gerard Cachon, a professor of operations and information management, from the 1990s to 2005, minimizing inventory was seen as a key to success. "The whole mindset has been, 'Let's get rid of it.'" But that was when most prices were stable or declining. Today, he says, it's not as clear that this is the best strategy. In fact, some retailers may want to start holding much more inventory than they did in the past as a way to hedge against future price increases. "Of course--it's a little risky to hold inventory that might (lose value), especially perishable goods and fashion-oriented goods--but to the extent (retailers) know that prices will be rising over time, they will start to try to hold more inventory."
Source: Wharton Business School, http://knowledge.wharton.upenn.edu

With the U.S. consumer price index up 5 percent for the year ending June 30 and unemployment currently at 5.7 percent, many retailers have found themselves in a tough situation, locked between rising product costs and a limited ability to raise their prices. Even cost-savvy market leaders such as Costco are having a difficult time. But Wharton faculty say that handled carefully, the current inflationary period may actually be a business opportunity for some retailers, especially if they make selective changes in inventory management, pricing and promotions.
That new thinking can begin with inventory. According to Gerard Cachon, a professor of operations and information management, from the 1990s to 2005, minimizing inventory was seen as a key to success. "The whole mindset has been, 'Let's get rid of it.'" But that was when most prices were stable or declining. Today, he says, it's not as clear that this is the best strategy. In fact, some retailers may want to start holding much more inventory than they did in the past as a way to hedge against future price increases. "Of course--it's a little risky to hold inventory that might (lose value), especially perishable goods and fashion-oriented goods--but to the extent (retailers) know that prices will be rising over time, they will start to try to hold more inventory."
Source: Wharton Business School, http://knowledge.wharton.upenn.edu