Hello everyone, welcome to inventory analytics. This is Dr. Zhao, I'm a Professor in Supply Chain Management at Rutgers Business School. In this video, I like to provide an overview to inventory analytics. Let me start with the story of Macy's. Macy's was founded in 1858. It is well known as the America's department stores, with annual revenue of about $27 plus billion in 2016. However, on March 31st, 2020, Standard & Poor's announced to remove Macy's from the S&P 500 Index, because Macy's market cap dropped dramatically in recent years, from $23 billion at the beginning of 2015 to about $1 or $2 billion dollars recently. It is a long journey of decline, and the COVID-19 pandemic is the last straw. It is the darkest time for Macy's in its 162 years. It would furlough the majority of its 125,000 employees. On the other hand, it is the busiest time for Amazon since its inception in 24 years. On April 13, 2020, Amazon plans to hire 75,000 more workers to keep up with demand during the pandemic. And it has just hired 100,000 new workers for its distribution centers since announcing the plan to do so in mid-march. The stock prices showed the trend of Amazon and Macy's in comparison to the S&P 500 Index since 2007. While having roughly the same starting point, Amazon stock price has risen significantly in comparison to the S&P 500 Index, while Macy's stock price keep up the same trend as the S&P 500 Index until 2015, and turned downwards since then. What drove these two companies that are engaging or competing in the same business, that is retailing, into dramatically different stock market performance? To answer this question, we need to understand the challenge of the retailing business. That is, you do not know what customers want when they entered your online or offline stores, but you still have to provide the right product at the right prize. Specifically, you must do all these four KPIs, key performance indicators, well in the same time to be successful, price, product variety, delivery, and cash conversion cycle or cash cycle. Inventory is a key enabler for all these KPIs. To be fair, let's compare the prices of Amazon and Macy's before the COVID-19 pandemic. Data in April 2017 shows that comparing 27 products in 8 different categories, Macy's on average is 26% more expensive than Amazon. Regarding product variety, a strong indicator of the company's ability to match customer demand with the right product, a study in your 2016 shows that Amazon offers 353 million SKUs. A news press in 2019 from Macy's website said that it is planning to aggressively grow the SKUs and the brands offered on Macys.com, and expects to reach its goal of adding 1 million vendor direct SKUs. We understand Macy's focus is on apparels, so such a broad comparison may not make sense. However, a study in year 2015 showed that Amazon has about 19 million apparel-related SKUs, and about 343,000 SKUs related to leading brands, while Nordstrom and Macy's only carry 85,000. In online retailing, customers are also concerned about delivery, and the total landed cost, which includes the shipping cost. Amazon charges a cheaper shipping cost relative to Macy's, where Macy's charge $10.99 for shipping, if the customer spends $99 or less. Given this data, which company provided a better product at a better price to customers? To answer this question, we can also perform a simple analysis. Which shows that from year 2015 to 2018 the sales and operating income of Amazon grew significantly, while Macy's stayed stagnant or was declining. Despite a much larger product variety, Amazon had a better operational efficiency than Macy's. Since year 2015, Macy's inventory days, that is the days of supply, is constantly about 120 days, while Amazon is about 40. Consequently, Macy's cash conversion cycle, that is the time from spending cash to buying materials, to receiving payment from customers, varies between 60 to 80 days, while Amazon is at about negative 30 days. Finally, Amazon's labor productivity is also twice as much as Macy's in year 2018. The story of Amazon and Macy's shows that it is possible for a retailer to outperform its competitors in all dimensions of price, product variety, delivery, and operational efficiency, which led to sales growth and cost reduction in the same time. One essential factor for a simultaneous success in all these dimensions is effective inventory management. Inventory is important in trade industries. For example, a $4 billion retailer may hold $1 billion of inventory, and a $45 billion pharmacy chain may invest $8.5 billion in inventory. In general, the S&P 500 retailing companies typically have 25 to 40% of their total assets in inventory. Thus, inventory management is an important part of sales and operations planning for these industries. An effective inventory management can increase the sales by increasing product variety and availability, and reduce cost and speed up the cash cycle by reducing excessive inventory. The impact of inventory has been demonstrated repeatedly in the past. By effectively managing inventory, Wal-Mart became the world's largest and the most profitable retail company; GM has reduced parts inventory and transportation costs by 26% annually; Dell's common stock price increased from $8.50 to $1,000 in 10 years. If inventory is not managed effectively, companies may lose significant revenue or suffer unanticipated cost. For instance, in 1994 IBM continued to struggle with shortages in their ThinkPad line. In 1993, Liz Claiborne said its unexpected earning decline is the consequence of higher than anticipated excessive inventory. And in year 2001, Cisco wrote of $2.5 billion in obsolete inventory. Upon completion of this course, you will be able to discover and solve some inventory problems by data analytics. Specifically, you can answer the following questions: first, for which industries is inventory important? Second, how may inventory drive a company's financial performance? Third, how do I know that I have an inventory problem? And finally, how to classify inventories and manage them accordingly? This course is designed for those of you who are working or exploring a career in supply chain management, especially in the areas of production, logistics, and sales and operations planning. And those of you who are fascinated by data analytics and hope to learn its applications in supply chain management. And also those of you who work with supply chain management professionals and want to understand their disciplines better. This course is designed for beginners with no prior experiences. The time commitment is about 2.5 hours a week for 4 weeks. It will be helpful if you know some general business concepts and supply chain management basics.
