How to Increase Your Profits While Keeping Your Costs Low?

Inventory Management – How to

Increase Your Profits While Keeping

Your Costs Low. In depth analysis of Home Depot and Target.  

August 8th, 2018

Managing a successful company requires expertise in various departments, but one of the most important aspects that might be sometimes neglected by some of the businesses is inventory management. Inventory management is extremely crucial as its objective is to increase profitability, balance supply and demand and also improve efficiency. As this function provides businesses with a lot of advantages, it also comes with many costs. Companies which would like to increase their revenues by holding a lot of inventory, need to consider various costs, which include not only holding costs, for example storage facilities, handling or insurance, but also setup costs associates with obtaining needed materials and equipment set ups. Other costs include ordering costs and finally shortage costs. In this essay I will discuss how big retailers manage their inventories in order to increase their profits and what strategies they use in order to decrease their costs. In order to discuss this matter in full depth, I will be focusing on two major retailers: Home Depot and Target. 

Home Depot is one of the most popular home improvement supplies retailing company, which not only operates in fifty states of United States, but also foreign countries, which include Canada, Mexico and Puerto Rico. The company currently has 90 distribution centers that serve over two thousand stores nationwide. On average, each store receives 4.2 inventories each week in order to ensure that products are available and the demand is met. Inventory is accounted for and tracked by a sophisticated software system rather than by store associates who used to be responsible for that function. This method allows the company to have an up to date data available at all times. Home Depot’s access to technology allows the store to maximize their efficiency by always having the right products in stock and preventing their customers from going to their competitors. The below graph shows Home Depot’s revenue trends between years 2013 and 2017. The graph also shows the revenue growth of their biggest competitor – Lowe’s Companies. Home Depot’s inventory management contributed to an increase in revenues as their stores are run efficiently and all products are available to customers at all times.

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Jennifer Smith in her article called “Home Depot Sets $1.2 Billion Supply-Chain Overhaul” discusses how the company is planning on investing $1.2 billion in the next five years. The funds will be used to create 170 more distribution centers across the country so that they can reach 90% of the U.S. population at a faster rate. The company’s goal is for consumers to receive their products within a day or even less. The company acknowledges that the increase in demand is caused by an increased popularity of an online shopping. Clients who shop online want to receive their products as soon as possible and at a low cost. This standard has been set up by other online retailers like Amazon, therefore customers choose where to shop based on how available a product they desire is. Many shoppers carefully pay attention to shipping costs and often make decisions based on how much a company is charging for each shipment. Having more localized distribution centers and warehouses will allow companies to offer free shipping as delivery costs will be reduced due to customers being located at close proximities from the delivery locations. The company’s objectives to meet needs of online shoppers are very important as in 2017 there was only a 6.7% increase in in-store sales, but digital revenues increased by over 21%. The number of distribution centers needs to be increased, because originally they were set up to only meet their store’s needs and online shoppers were not accounted for. With the increased number of warehouses, the company will be able to ship products directly from distribution centers to customers, rather than wasting time shipping an item to the store and then having the store finally ship the merchandise to the customer. Lastly, the distribution centers will allow customers to pick up ordered items on their own at their convenience. This function will allow Home Depot to save money on delivering merchandise.

Home Depot also realizes that in order to increase their revenues, they need to focus on keeping their inventory costs low. The company plans to invest into cars and vans that will be responsible for smaller deliveries, rather than using their traditional trucks. Professional customers account for 40% of their clients, therefore the company will also invest into specialized flatbed trucks that will be delivering building materials. The plan is to also build specialized distributions centers located around their biggest customers that will ensure that deliveries are time efficient and costs of those deliveries remain low due to shorter distances between distribution centers and customers. Company executives announced that increased profits and decreased costs will result in additional promotions and discounted items for customers so that the benefits of those improved strategies in inventory management can provide advantages to not only the company itself, but also to all consumers.