by Gad Allon
The Wall Street journal had an interesting article on how consumers have started implementing Just-In-Time inventory management when it comes to managing their household inventory (“The Just-in-Time Consumer“, Nov 2010).
For over two decades, Americans bought big, bought more and stocked up, confident that bulk shopping, often on credit, provided the best value for their money. But the long recession—with its high unemployment, plummeting home values and depleted savings accounts—altered the way many people think about the future. Manufacturers and retailers report that people are buying less, more frequently, and are determined to keep cash on hand.
This is a very interesting point on how people manage their household inventory. When we teach inventory theory – one of the canonical formulas is the EOQ – Economic Order Quantity, which tells us how much we should buy when trying to balance two costs: the cost of transportation (i.e. trying to minimize the number of trips to the store) and the cost of holding inventory (either physical holding or financial one- such in the case for people buying on credit). The formula tells us that as the interest rate grows (or the cost of borrowing), the amount ordered and bought should go down, and thus the frequency of purchases will go up. Overall this will result in a decrease in the amount stocked (and with it the amount owed to the credit card company).
While most people are not aware of this formula – it is nice to see that people act rationally and react to the new economic situation appropriately. It is important to note that this does not mean that the total amount bought over the year goes down or up – it merely says that the average inventory level goes down (and with it the financial costs of the household).
It is not surprising to see that stores are taking a note:
Grocers are trying to accommodate smaller but more frequent shopping trips. Supervalue Inc. is changing displays more often. BJ’s Wholesale club Inc. is going after a new clientele of families and individuals by selling eggs and margarine in smaller lots. Apparel makers and retailers such as Elie Tahari and Net-a-Porter.com are changing their production and selling schedules for shoppers who increasingly want to buy their clothes in season rather than ahead of time.
BJ’s are trying to make the stores more attractive and more suitable for short trips (by including more seasonal items in the featured shelves). In the apparel industry, until now most of the stores have “trained” their customers to buy ahead of the season (to the extent that if you needed a coat by the end of the winter – your chances of finding one in stores were slim). Net-a-Prter.com are trying to change it by having agreements with manufacturers to have a steady stream of fashion throughout the seasons, with some having late deliveries to accommodate just-in-time consumers.
But there are other issues one needs to consider: smaller packages are more expensive to produce and usually cost more the consumer. But if consumers continue to follow their inner EOQ’s we will see the right balance there.