354 Int. J. Procurement Management, Vol. 9, No.

3, 2016

Inventory control in the retail sector: case studies of

best business practices

Terry Damron* and William T. Rupp

College of Business,
Austin Peay State University,
Clarksville, TN 37044, USA
Email: DamronT@apsu.edu
Email: ruppw@apsu.edu
*Corresponding author

Alan D. Smith
Department of Marketing,
Robert Morris University,
Pittsburgh, PA 15219-3099, USA
Email: smitha@rmu.edu

Abstract: Essentially all service and manufacturing organisations, especially

within the retail industry, are struggling to find a balance in their inventory
strategies that will not only keep the materials on hand to satisfy customer
requests, but simultaneously limit the amount of inventory space they use in
order to meet these demands. Although the manufacturing industry may have
specialty materials that are used, it has proven difficult to be prepared for what
design changes the customer might suggests. Many of the same parallels have
been experienced by retail managers. This paper will discuss the importance of
one of the major strategic decisions in operation management; namely
inventory management within the retail environment. The case study looks at
the best practices between two Pittsburgh, PA-based retailers, Dick’s Sporting
Goods and American Eagle and highlights additional strategic decisions, such
as supply chain and human resources as particular aspects of inventory
management is examined in closer detail and how it relates to the financial
well-being of each company.

Keywords: case study; corporate social responsibility; CSR; distribution

logistics; inventory control; inventory software; supply chain management;
SCM; supplier collaboration.

Reference to this paper should be made as follows: Damron, T., Rupp, W.T.
and Smith, A.D. (2016) ‘Inventory control in the retail sector: case studies of
best business practices’, Int. J. Procurement Management, Vol. 9, No. 3,
pp.354–371.

Biographical notes: Terry Damron is a Marketing Instructor in the Department

of Management and Marketing at Austin Peay State University where she
teaches social media marketing, sales management, and retailing management.
A practitioner-turned instructor, she worked in non-profit marketing for nine
years before moving to academia in 2014. Her work earned recognition from
the Council for Advancement and Support of Education and the Tennessee
College Public Relations Association.

Copyright © 2016 Inderscience Enterprises Ltd.

 Inventory control in the retail sector: case studies of best business practices 355

William T. Rupp is the Dean of the College of Business at Austin Peay State
University in Clarksville, Tennessee. He holds a PhD in Strategic Management
from the Terry College of Business at the University of Georgia and MBA
from the University of Montana. At Austin Peay, he holds the rank of Professor
and teaches management courses. He has served as the Dean of the
Michael E. Stephens College of Business at the University of Montevallo in
Montevallo, Alabama, and as Associate Dean of Graduate Programs at Robert
Morris University in Pittsburgh, Pennsylvania. His research interests include
organisational transition management, formulation and implementation of
strategy in organisations, and knowledge management and have published over
50 articles.

Alan D. Smith is currently University Professor of Operations Management in

the Department of Marketing at Robert Morris University, Pittsburgh, PA.
Previously he was Chair of the Department of Quantitative and Natural
Sciences and Coordinator of Engineering Programs at the same institution, as
well as Associate Professor of Business Administration and Director of Coal
Mining Administration at Eastern Kentucky University. He holds concurrent
PhDs in Engineering Systems/Education from The University of Akron and in
Business Administration (OM and MIS) from Kent State University, as well as
author of numerous articles and book chapters.

1 Introduction

1.1 Importance of inventory control management

Inventory can be simply defined as the raw materials, work in process and finished goods
that are ready for sale; these goods are considered to be an asset of the corporation. It is
critical to manage this asset correctly as large amounts of capital are tied up in inventory.
In the retail business, for example, inventory can represent as much as 35% to 50% of
total invested capital (Paksoy and Cavlak, 2011; Pettersson and Segerstedt, 2011;
Pradhananga et al., 2011). Most analysts and executives traditionally emphasise the roles
of finance and accounting and will recognise a company’s inventory as an asset.
However, on the operational side of the company, inventory is considered a liability,
especially in the retail sector (Smith and Rupp, 2013).
Inherently, inventory is not a valued asset and more of a liability to an operations
manager if there is no demand and if the goods cannot be transformed to a profitable sale
for the corporation. Excess inventory consumes valuable working capital that could be
used in more profitable ways. There is a significant amount of risk involved with the
inventory a company has in stock. With the inheriting risk and large amounts of capital
invested in these products, it becomes necessary to track, measure, and manage the goods
so the company can balance between their inventory investment and customer service
(Smith, 2015a, 2015b). Even though inventory is risky, the retail store cannot keep their
inventory so low that it negatively affects possible sales. A retail customer wants to come
in and see the inventory neatly organised, cared for, and plenty of choices in style, size,
and price point. Hence, a balance must be achieved. For example, one major issue is that
it is difficult to manage inventory for perishable items with unpredictable demand. The
supply chain of perishable products is much more difficult to manage than that of
non-perishable products, because of numerous factors. These include the short life cycle,
356 T. Damron et al.

low salvage value long supply chain, uncertainty of supply and demand and dynamic
pricing of perishable items (Routroy and Bhausaheb, 2010). Perishable items can be
classified into two categories, time dependent and time independent. Time dependent
products (e.g., fruits, milk, Christmas trees) and time independent products (e.g., fashion
merchandise, winter clothing, mobile electronic devices) are extremely useful to
customers for long periods of time, but their value decreases significantly, bit
significantly different and longer than time-dependent inventories.
Inventory levels affect retail sales, but the effects may be one-sided, since low
inventory levels will decrease sales, but high inventory does not necessarily increase
sales. There are several prime shopping periods such as Christmas and back-to-school,
where these seasonal variations increase the sales rate and a decrease occurs at the end of
the product’s season, compounded by high volume and inventory ratios coupled with
reduced profits due to greatly reduced profit margins. When the on-hand inventory falls
below a certain level at any given store, the sales rate may drop. This is especially true
for apparel when there is an incomplete selection of sizes and colours. It is important to
have sufficient inventory to create an attractive in-store display to draw customers’
attention to the product. Standard deviation of variations in demand due to random
fluctuations can be calculated from average demand over a planning period for economic
order quantities. However, as suggested by Mattsson (2010), systematic seasonal
variations in demand related to inventory control cannot be calculated with traditional
reorder point systems. These seasonal variations are largely being classified under
non-stationary demand models, which are not easily adapted for use with many current
ERP systems. Using any inventory control method for inventory management requires
that demand during lead time, order quantity, and safety stock is determined. Mattsson
(2010) suggested that part of the solution is to develop an extension of the traditional
reorder-point model that can be evaluated and compared with traditional reorder systems.
This solution suggests that to meet expected service levels, it is important for firms to
factor in seasonal variations when calculate their demand during the lead time portion of
reorder point. Undoubtedly, logistical considerations must enter the inventory cost
equation as well (Basu and Nair, 2012; Brito and Botter, 2012); although this topic is
beyond the original discussion of this present study.
If the inventory is not properly managed, not only can the retailer miss the profits at
the beginning of the season with levels too low to meet demand but there will be
increased costs at the end of the season if the retailer cannot effectively sell the on-hand
inventories. Price mark downs will be necessary and the expected profits from the
investment in inventory could be greatly miscalculated. When a sales season is coming to
an end and there is excess inventory there are price mark downs and clearance sales.
Once the clearance markdowns occur they are typically permanent and the price will not
be readjusted to a higher price. Demand has decreased towards the end of the season and
decreases even more as selections dwindle; in the clearance sale there will be limited
sizes and colour options left. A shopper may walk into the store for one purpose and then
find out in the back of the store there are clearance items available and hopefully the
discounted price will help the organisation reduce the excess of inventory and have one
last chance to sell the items before they become obsolete and are replaced by next
season’s items (Smith and Achabal, 1998).
There are a number of academic studies that the inventory strategic decision of
operations management. Perhaps, the fundamental issue to be solved is whether or not
efficient inventory management leads to an improvement in a firm’s financial
 Inventory control in the retail sector: case studies of best business practices 357

performance (Aldaihani and Darwish, 2013; Azadeh et al., 2013; Ali and Alolayyan,
2013; Bhamu et al., 2013; Fumi et al., 2013). Inventory turnover ratio, a very common
metric to evaluate the successful management of inventories, basically illustrated how
many times a company’s inventory is sold and replaced over a period. This ratio is
considered a good indication of inventory management practices, because a high or low
value could indicate certain performance in controlling inventory levels. Generally, a
higher inventory turnover ratio is an indication of better performance and a lower ratio
may be an indication of overstocking which may pose risk of obsolescence and increased
inventory holding costs. The gross margin represents the proportion of each dollar of
revenue that the company retains as gross profit and net operating margin shows what
proportion of revenue is left over after paying for variable costs of production. These two
margins are good indicators of performance because they show how much money the
company is actually making and retaining.
For example, Koumanakos (2008) used inventory turnover ratios as an indicator of
the implementation of inventory management practices and two profitability accounting
ratios as indicators of corporate performance. The secondary issue is that it is difficult to
isolate the effect of inventories due to the great number of possible determinants of
performance. Historically, economists have focused on industry-level variables which
stress the role of industry concentration and a firm’s market share, since higher levels of
both could be linked to higher profitability (Dharni, 2014; Soon et al., 2015). There are
other determinants that may be included that serve as a more of a strategic focus (e.g.,
ownership structure, strategic direction, size of board, innovation, stakeholder needs, to
name a few) (Alderete and Gutiérrez, 2014; Chand et al., 2015; Han et al., 2015; Gupta
and Naqvi, 2014).
The data used in Koumanakos’s (2008) analysis, containing financial information on
medium to large Greek firms in the food, textile, and chemicals industries from the years
2000 to 2002, found that these firms accounted for approximately 33% of the total
manufacturing output in Greece in the year 2000 (n = 1,358 firms observed). The
inventory turnover ratio was calculated as [inventories × 365] / cost of sales. Profitability
was measured by both the gross margin, which was calculated as sales – [cost of goods
sold / sales] and net operating margin, which was calculated as net operating income /
(sales + other operating income). The gross margins of the sample firms were considered
low, while the mean net operating margins were all negative. It took an average of
150 days for the firms to sell inventory, which is much more than that of other developed
countries. The mean values of all variables were used in the analysis and the author found
a negative correlation between inventories levels and profitability. The results suggested
that the majority of sectors and years under investigation had a negative relationship
between profitability and inventory management. Perhaps, one could conclude that the
relatively long time period for firms to sell inventory meant that inventory management
was poor. However, this fact could be due to the high importation of intermediate goods
as manufacturing inputs. Gross margins of the sample firms were considered low, which
could mean that these companies had high costs-of-goods sold, or in-other-words, high
inventory costs. The fact that net operating margins were all negative meant that the
company was either not producing enough revenues, their overall costs were too high, or
a combination of both. The negative correlation between inventories levels and
profitability meant that when inventory levels were high, profitability was low and vice
versa. Overall many studies have tried, with varying degrees of success that efficient
inventory management leads to an improvement in a firm’s financial performance
358 T. Damron et al.

(Kamhawi, 2008; Kayas et al., 2008; Kwahk and Lee, 2008; Lowe and Locke, 2008;
Morton and Hu, 2008; Parthasarathy and Ramachandran, 2008). Unfortunately, due to the
differences in influences and industries, it is difficult to detect any consistent patterns to
uniformly support such a research hypothesis.
One of the potential problems with using inventory turnover ratios as an indicator of
inventory management policies is that while a high value can indicate better performance,
a very high value could result in the loss of sales due to inventory shortage. As an
inventory is selling quickly, does not necessarily mean management is adequately
controlling the levels. Whether a high or low value is good or bad depends on ultimately
on the industry. An industry with perishable inventory might have a high turnover,
whereas an industry selling vehicles might have a low turnover. This does not necessarily
mean that the high turnover is good or that the low turnover is unwanted or unexpected.
Such ratios must be compared to other businesses in each specific industry.
Another issue of contention is that a number of studies using net operating margins as
an indicator of corporate performance may not look at long enough period that would
include the impacts of economic and/or managerial leadership changes. As the global
economy is currently in the midst of an economic transition, with energy, specifically the
high volatility of oil costs, coupled with geopolitical conflicts, the dynamic of inventory
may be influx. Perhaps, such studies need to simultaneously inspect the change in net
operating margin over a longer period of time to determine if the company was operating
more or less profitably than it should be or it had in the past. Such analysis may lead to
improved indications and measures of corporate performance. Although when focusing
on testing the hypothesis of whether inventory management has an effect on performance
in one specific industry, few doubt that in the long term, it makes sense that if a company
is adequately managing its inventory levels, performance should improve. Unfortunately,
there are other uncontrollable factors that have detrimental effects on firm performance
that are either simply ignored or no adequate metric exists to capture its potential
influence on inventory controls.
As noted by previous research on SMEs (Rajeev, 2008), in other parts of the world,
including Finland and Greece, have discovered that inventory management decisions are
typically made at the operational level with minimal guidance from the top. Precise
quantitative goals could not be established due to the lack of accurate, real-time and
suitable aggregate information of material flows and stock level. Frequently, inventories
were forced to be reduced due to financial pressures and few to no decision making
models were applied. Overall, integrated decision support systems were seen as
unnecessary and costly and the apparent lack of computer knowledge and overall attitude
toward technology was the main reason computers were not used. Unfortunately, most
SMEs lacked professional expertise and generally make decisions based on intuition
alone.
 Inventory control in the retail sector: case studies of best business practices 359

2 Method

2.1 Sample selection

The two relatively large Pittsburgh, PA companies analysed from a case
study-perspective followed in the order included: Dick’s Sporting Goods (DKS), a major
employer of the metropolitan area of Pittsburgh and provider of nationally known sport
appeal and equipment; and American Eagle Outfitters (AEO), a leading global specialty
clothing, accessories and personal care products retailer. Initially, brief introduction to its
general corporate and operating environment is followed by sections describing its
selected descriptions of inventory management systems, and key inventory techniques.
Ending sections deal with basic comparisons of inventory management systems’
efficiencies. The general comments given by respondents during the interview process in
all cases were quite confidential and, hence, somewhat restricted in certain details. This
qualitative case study looks at the best practices between two relatively large retailers and
highlights some of the important strategic decisions, such as supply chain and human
resources as particular aspects of inventory management to be examined in closer detail.

2.2 Qualitative business case study

The qualitative case study is an approach to research that helps the exploration of a study
of interest within its context using a variety of data sources. This ensures that the issue is
not explored through one lens, but rather a variety of many possible viewpoints to help to
reveal and understand the concepts associated with the study (Stake, 1995). So when
should you use a case study approach? Yin (2003) suggested that the case study design
should be considered when: The focus of the study is to answer ‘how’ and ‘why’
questions; researcher cannot directly manipulate the behaviour of those involved in the
study (this the typical scenario in most business survey studies that the authors have been
involved with); researcher wants to cover contextual conditions because they believe they
are relevant to the phenomenon under study; and, probably most importantly, the
boundaries are not clear between the study and context. Hence, a combination of personal
interviews of upper-to-middle management, as well as comments from convenient
samples of employees was used to gather perceptions of the accuracy of the various
firms’ strategic management processes within a customer service focus. Most of
information contain in this case study was not just from personal experiences of
respondents, but was obtained either directly from the firms’ websites, press releases, or a
combination of both sources.

3 Business case discussion

3.1 Case 1: DKS

3.1.1 Corporate overview
Founded in 1948 by Richard Stack, DKS is a retail-sporting goods chain located
nationally, a Fortune 500 company with nationally recognised brands (i.e., 525 stores in
42 states). In 2007, DKS acquired Golf Galaxy to add 81 locations nationwide. With
360 T. Damron et al.

25,000 employees, the company is a highly successful and profit bearing entity, bringing
in annual revenues of approximately US $5 billion. With its vast amount of retailers
nationwide, it is essential that DSG practices excellent inventory management techniques
in order to be successful and grow their revenue. The company’s corporate mission is to
be recognised by their customers as the primary retailer in sports and fitness specialty
omni-retailer; serves and inspires athletes and outdoor enthusiasts to achieve their
personal best through the relentless improvement of everything they do (Dick’s Sporting
Goods – Official Site Every Season Starts at Dick’s, 2014). Management at the company
feel that it strives to be an equal opportunity employer and its employees are exemplary
individuals. A human resources’ focus allows the company to stand above the rest in the
sporting goods sector and prosper as a company.

3.1.2 Description of inventory management systems

DKS is well known for carrying a multitude of products including items related to
outdoor sports, winter sports, clothing, summer sports appeal and accessories. Over the
past several years, the company has been leveraging omni-channel fulfilment, which
allows for quick inventory turnover and convenience to the customer. The most popular
capabilities include online purchasing, in-store ordering and the ability to ship a product
directly from the manufacturer to the customer, thus avoiding the middle-man retailer.
One of the most essential functions management has incorporated is the ship-from-store
method of ordering. These techniques allow a customer to order any product, regardless
of its actual physical store location, and have it shipped to their home address. Inventory
can be readily managed and mitigated through this process because of the fast turnover.
In terms of inventory travel, the retailer has deployed several major systems to optimise
the movement and management of inventory. This technology automates distribution
centres, tracks and coordinates domestic and international freight, monitors the
performance of vendors, helps to control costs and provides real-time insight into the
productivity of the retailer’s network (Giannopoulos, 2013). Keeping a close record on
the inventory and its distributions allows for management to forecast and transition
inventory very readily. For many years, the company did not implement major automated
forms of inventory control. As technology became a large part of everyday business, it
begun to get incorporated into the everyday inventory control techniques.
In addition to regular, day-to-day inventory management, management has developed
an awareness of the trending products inventory. Essentially, the company will sell goods
based on the demand for the item during different time periods in the yearly cycle. For
example, during the NHL playoffs, the company will keep a relative large inventory of
team jerseys in stock due to the demand for the product. DKS may stock some of the new
gear for a particular sport when the season is about to commence. The decision that has to
be dealt with is what are we going to do with the inventory has sold after the trend has
passed? The strategy to deal with inventory turnover will be to promote buying through
sales and special offers. This will generate a demand for the product and help move
inventory and its liability from the shelves.
Goods will differ depending on the location of the store. In order to deal with the
variety of goods and geographic locations nationwide, DKS has implemented JDA’s
assortment optimisation solution to localise inventory more effectively based on customer
preferences and demand (Fiorletta, 2012). JDA is a software package that allows stores to
track and actively management inventory allocations based on the stores respective
 Inventory control in the retail sector: case studies of best business practices 361

geographical place. A few of its benefits include reduced stock-outs and inventory levels,
promoting improved customer satisfaction and partner relationships, easier item
assortment planning, relaxing prescribed measures and rules with flexible formula-driven
tactics, multiple graphical visualisation capabilities, and recommended assortments will
fit available shelf space. “There’s an overall goal standard for retailers to keep the
shopper at the center. If you’re creating assortment without thinking about the shopper,
an assortment is worthless.” an executive at Dick’s quoted [Fiorletta, (2012), p.1]. This
ultimately meant that management determines special needs of inventory for each of their
subsequent locations nationwide and parallels it to customer’s needs. JDA software helps
to take the guessing of particular goods needs at each of its locations but may leave slight
ambiguity to the out of stock and reordering need. The idea is the employee actively
managing the inventory will make it consistent with the needs of the customer.
Over the past ten years, management has evolved its inventory tracking techniques to
better correlate needs to the customer demands. Implementing new technology and
inventory tracking strategies has allows DKS to become a leading providing in sporting
goods nationwide. As a business grows and the customer base is defined, it is essential
the business keep up with demand by actively managing inventory and actively managing
the supply chain from raw materials to the end user.
Thousands of activities are performed and coordinated within an organisation’s
supply chain. In simple terms, supply chain management (SCM) may be defined as the
management of the flow of goods. SCM promotes the movement and storage of raw
materials, work-in-process inventory, and finished goods inventory from origin to
consumption (Von Haartman, 2012). Distribution logistics deals with the design of
products and parts that would fit together in a way to reduce the amount of waste to a
minimal amount, and keeping that product from being damaged. Success, in this case,
would be determined by how well those packaged modules could be stored and
transported, something that many retail stores’ operations managers continue to struggle
with (Arif Khan et al., 2009). Much research has concluded that the supply chain/supply
chain activities are critical to the company’s performance. Successful SCM requires
integrating business processes with key members of the supply chain. Failure to do this
causes valuable resources to be wasted, ultimately, causing inefficiencies. A truly
effective supply chain should be seamless and invisible to the customer. Managing a
supply chain effectively considers all the relevant supply chain factors. Factors affecting
the supply chain are: complexity, production demands, partners, environment, logistics,
materials/services and cost of quality (Kumar et al., 2011; Mathirajan et al., 2011; More
and Babu, 2012; Paksoy and Cavlak, 2011).
Supply and demand management is crucial in helping to match customer wants/needs
with company resources. Ultimately, one might ask: Is the SCM (supply and demand)
worth the hassle? To help formulate an answer, a simple analysis of the basic model of
supply and demand. If too great of a supply leaves the company with a surplus, this
surplus can translate into reduced liquidity because of the amount of capital invested into
inventory. This ultimately means less money to invest in other aspects of the company.
However, too little of a supply leaves the company with a shortage. A shortage can cause
many problems such as customer loss because they are not willing to wait for the product
on back-order. Hence, this customer loss translates into lost revenue for the company.
Management teams can use a variety of techniques to match demand; however, the
most commonly used technique is forecasting (Smith and Offodile, 2007). To forecast
demand a company such as DKS could use a multiple regression model to account for the
362 T. Damron et al.

effects numerous variables can have on actual demand. They could use both micro and
macro independent variables to generate a better holistic view of demand. Essentially, an
effective demand management system uses all available data to reduce uncertainty and
provide an accurate forecast of the supply chain.

3.1.3 Summary of selected key inventory techniques

DKS has achieved profound success due to its strong core competencies and they have
achieved great success from their management of inventory. These aspects have allowed
management to garner great success in the sporting goods market. Like most companies
in the global economy, technology has played a major role in its inventory management
systems. Applications of technology have allowed the company to become an industry
leader in its management of information systems, which has allowed the company to
develop a state-of-the-art inventory management system. This advanced inventory
management system allows management to have real time information with both
domestic and foreign suppliers. This system gives it the ability to track products through
the supply chain and know in real time how many new products have been produced by
its suppliers during the current business day, especially with some of its competitors
(Table 1).
Table 1 Compassion of selected inventory metrics between the two companies showcased in
the present study

DKS compared to Foot Locker (FL)

DKS FL DKS FL
Efficiency Days Days Difference Inventory Inventory Difference
inventory inventory turnover turnover
2005 85.32 101.55 16.23 4.28 3.59 –0.69
2006 96.05 111.29 15.24 3.8 3.28 –0.52
2007 96.88 116.26 19.38 3.77 3.14 –0.63
2008 102.19 117.4 15.21 3.57 3.11 –0.46
2009 107.92 116.01 8.09 3.38 3.15 –0.23
2010 99.96 111.77 11.81 3.65 3.27 –0.38
2011 95.59 108.27 12.68 3.82 3.37 –0.45
2012 96.47 101.48 5.01 3.78 3.6 –0.18
2013 96.35 98.38 2.03 3.79 3.71 –0.08
2014 99.53 99.64 0.11 3.67 3.66 –0.01
Average 97.626 108.205 10.579 3.751 3.388 –0.363
Source: Derived from Growth, Profitability, and Financial Ratios for DKS
(2014) and Growth, Profitability, and Financial Ratios for FL (2014)
Success at DKS in SCM-related activities has translated into the company
obtaining strong financials. As seen in Table 1 over the period of ten years, DKS has
averaged a 10.579 shorter days in inventory than its competitor Foot Locker (FL). The
days-in-inventory is a financial ratio measuring how long it takes a company to convert
its inventory into sales. The lower days in inventory suggest SCM system, along with its
forecasting methods may be accurately forecasting demand for its products. The ratio of
 Inventory control in the retail sector: case studies of best business practices 363

inventory turnover explains how many times a company’s inventory is sold and replaced
over a period. On average, the company’s inventory turnover has outperformed its
competitor FL.
When one inspects some of the other financial ratios, it is apparent that DKS has
outperforms a number of industry’s inventory-related averages. The company is currently
on par with the industry average for their current ratio; essentially a liquidity ratio that
measure ability to pay short term debt. The profitability ratios indicate the company is
more profitable than the industry average. DKS apparently is more liquid than its some of
its competitors; this can be attributed to its management of inventory which is superior to
its competitors. Overall, the company is out performing both its competitors and the
industry average on selected metrics. Its inventory management system should continue
to grow in effectiveness and efficiency and further perpetuate its financial success.

3.2 Case 2: AEO

3.2.1 Corporate overview
AEO is a global specialty retailer that offers quality and fashionable clothing, accessories
and personal care products at relatively reasonable prices. Founded in Novi, Michigan in
1977, the company was taken over by Schottenstein family in the early nineties. It was at
this point, the company introduced its first line of private-label merchandise. The
company has grown to offer a diverse array of clothing brands (e.g., AEO, Aerie, 77
Kids, Little 77); with a target market ranging from infant to early adult for both men and
women. Just in the past few years, the company has significantly increased its global
presence and expanded to Canada, the Middle East, Hong Kong, China and Russia with
future plans to expand into the Japanese and Israeli markets. With over 1,000 locations,
30,000 associates and corporate offices in Pittsburgh, New York City, and Hong Kong,
management, as with many successful companies, prides itself on its corporate culture
that builds on its core values.
In order to facilitate trust, honesty, and integrity company wide, a corporate code of
ethics was implemented which to helps ensure their commitment to excellence. They are
committed to a set of guiding principles, including respect of human rights, a code of
ethics, and vendor code of conduct, which apply to every associate, officer, director and
supplier of the company (Corporate Governance, 2014). The Board of Directors is
equally committed to maintaining high ethical standards and corporate governance to
instill trust in all stakeholders, business partners, and the marketplace (Guiding
Principles, 2014).
Ultimately, AEO’s products are what drive company success and profits. Products
can vary by season with respect to weather and cater to the teen to early adult markets.
Although appropriate proactive actions and legal precautions are taken in order to ensure
the safety and well-being of customers, AEO is still subject to local laws and standards.
All products are required to meet US State and Federal regulations as well as
international standards. An extensive recall process is put in place to handle the
unfortunate circumstances of an unsafe product reaching store shelves. Management is
very conscious of the way their brand image is being received and is mindful of keeping
it in positive light, knowing with a suffering image and reputation their business could
falter.
364 T. Damron et al.

The global supply chain they employ is an important aspect of their business; it is the
means by which products flow efficiently and revenue is obtained. Products are
manufactured and shipped from countries all over the globe including: China, Guatemala,
India, USA and Vietnam (Supply Chain, 2014). The overarching goals of their global
supply chain are as follows:
1 utilise new technology database systems to enhance analysis and ways to collect and
report performance data
2 improve efforts to address social compliance issues including unauthorised
subcontractors, laundries, fabric mills, and informal workers
3 identify root causes of compliance issues and develop systematic training and
capacity building programs to improve factory management systems
4 ensure corporate social responsibility (CSR) and social compliance issues are
addressed in day-to-day business practices.
Overall AEO offers a wide variety of products catering to multiple types of people and
age groups and aims to increase customer satisfaction. The company strives to maintain a
strong image in the marketplace and works to expand their products by improving
multiple areas of their business. In order to improve company success, proper inventory
management is essential. Inventory management is crucial because inventory accounts
for all of the revenue derived from the sales of their products. Inventory management
allows firms to manage manufacturing, sales, purchases, distributions, and payments.
Since it directly affects working capital, production and customer service, managing
inventory incorrectly can create many problems for businesses. This includes loss of
productivity, the manufacturing of unwanted items, a reduction in the levels of customer
commitment, the accumulation of costly physical inventories and frustration (Rajeev,
2008). Undoubtedly, these problems can threaten a firm’s viability.

3.2.2 Description of inventory management systems

In order to understand how inventory is managed it is important to first understand what
drives demand for all retails as well as for AEO is its products. The apparel industry as a
whole faces a significant degrees of risk. This industry is required to predict and respond
to constant changing consumer preferences as well as fashion trends. AEO, more
specifically, deals with seasonal, and cyclical demands (Umansky, 2009). Seasonal
demand is related to the weather and special holiday events, while clothing and products
sold during the winter months vary greatly from the clothing and other products
manufactured and sold during the summer months. Adding to the stresses of seasonality
is the cyclical demand imposed upon retail stores. Domestically, the business cycle of
demand for the apparel industry peaks during the Christmas season, late October through
December, with demand plummeting harshly thereafter. Demand does not pick up
significantly again until the ‘back to school’ period during the late summer to early fall
time period. Both of these demands create high volatility that management and the retail
and the apparel industry as a whole have to address through effective inventory
management. As a result, proper management of current inventory and procurement of
future inventory is paramount to the success of any company operating under these
fluctuating conditions.
 Inventory control in the retail sector: case studies of best business practices 365

As a result of the high seasonality and cyclicality of demand, management was forced
to find a solution to mitigate their increasing costs associated with inventory; holding
onto high levels of inventory can result in costs associated with inventory to increase
rapidly. Storage costs for the current, as well as future inventory, is increased due to old
inventory taking up valuable space that should be used for the current or in-coming
products. Rapid changing preferences compounded with changing demands, cyclical and
seasonal, can create a situation where inventory levels are at extremely high levels. In
order to get rid of excess inventory and recuperate some of the costs, many products were
significantly discounted, resulting in low to negative profit margins. Discounting was
used so heavily in the recent past, products per sale increased, however revenues did not.
This a dilemma that many retails face to attract buyers between seasonal promotions. One
of the main issue that AEO faces regarding their discounting strategy; discounting
decreases profit margins and can ultimately stagnate revenues.
Management is striving to take a more proactive approach to inventory management
with mixed results in the retail industry. One of their strategic goals is to align inventory
and products with the current fashion trends. In order to accomplish this strategic
directive, they have remodelled some of their stores in order to showcase the current
trendy products. Through their new design they highlight and individualise these products
pushing them on the consumer from the moment they walk into the store or visit the
corporate website. The out-of-season or less popular items are slowly discounted while
being pushed farther toward the back of the store. This general process model of layout
and inventory holding within the store allows for focus on the current trends while
maintaining profit margins on the products that are out of season or obsolete. In
highlighting the current trendy clothing they are promoting positive turnover and
breaking the cycle of increasing the current obsolete inventory. Through the slow
degradation of price, the clothes are slowly becoming outdated are slowly marked down.
Optimally, the price decrease would be equal to the amount of consumer interest lost due
to changing trends. Therefore, still allowing AEO to realise profit on the item before it is
completely out dated (Factors Supporting Our Bullish Outlook for American Eagle
Outfitters, 2014).
Another proactive step that management has taken is creating specialty positions,
such as Inventory Integrity Supervisor. The individual in this position is required to
maintain inventory databases, review and report results of audit and operational accuracy,
and, ultimately, assist in planning, preparing, and the execution for the inventory
reconciliation process (Inventory Integrity Supervisor, 2014). Creating these positions
helps to ensure inventory management remains a top priority through the company.
As the current trend in business is overwhelmingly e-commerce and m-commerce,
AEO Direct allows for the incorporation of an ecommerce model into the brick and
mortar store (American Eagle Outfitters, 10-k, 2010). Along with purchasing items online
and in stores, customers can utilise AEO Direct which is the store-to-door program for
AEO. This medium of purchasing products has individual advantages associated and
available only with this type of ordering process. Essentially, the store-to-door program
allows associates to sell products not available in stores as well as out-of-stock items
directly to the customer, free of shipping costs for the customer. Simplifying reverse
logistics gives customers the opportunity to purchase extended sizes not offered within
physical stores, colours or options not currently available, and the availability for the
overall customisation of the product. This type of operation reduces total reliability on
inventory in individual stores. By decreasing the need to directly supply all demand
366 T. Damron et al.

within the store, the costs associated with holding inventory at the store level are
significantly decreased. Inventories can be held in a consolidated location and in then
shipped directly to the customer from the holding site of direct from the manufacturer
(e.g., drop shipment). This strategy decreases shipping costs of inventory to the store,
creates a more unified inventory system, and can decrease error in forecasted demand
because supply is monitored more closely.
Since the global financial crisis of 2007/2008, the company has experienced difficulty
in achieving stability in its inventory management policies and procedures. After
implementing different strategies they have started to rebound and are starting to see
results from the programs implemented. This can be partially quantified by looking at the
firm’s inventory turnover ratio. The inventory turnover ratio measures how fast the
company can turnover their inventory within one fiscal period. A high ratio basically
indicates a light inventory, which can lead to less money spent on storage, write downs,
and obsolete inventory. However having too light an inventory can affect sales because
there is insufficient supply relating to demand. Figure 1 depicts AEOs inventory turnover
for the periods ending January of 2005 through January of 2014. Hence, the increasing
current inventory turnover ratio quantifies and measures how well the implementation of
new policies, procedures, and jobs has bettered the inventory management overall.

Figure 1 Inventory turnover for AEO during the periods ending January of 2005 through January
of 2014 (see online version for colours)

3.3 Summary of selected key inventory techniques

In general, AEO exhibits sound strategies when it comes to managing their inventory.
Management have utilised many aspects of inventory management tactics and strategies
to help ensure its inventories are kept at a sufficient level. By implementing various
discounts, they are able to eliminate excess inventory that would have otherwise resulted
in sunk costs. Aligning inventory levels with sales trends and seasonal/cyclical demands
allows the store to reap the most profit and continually satisfy customers. AEO Direct
gives customers flexibility and customisation when it comes to their desired products, yet
it decreases inventory within the stores. Various positions in the company are solely
responsible to ensure all inventory measures and processes are carried out efficiently. As
 Inventory control in the retail sector: case studies of best business practices 367

earlier demonstrated, its increasing inventory turnover ratios indicate the policies and
procedures put in place have proven to be successful. Overall, the company’s success and
continual growth are indications of how their strategies and processes, like those taken to
manage inventory, have helped grow the AEO brand.

4 Discussion

4.1 Quick comparison of company’s inventory techniques

When comparing two large Pittsburgh-based retailers and how they manage their
inventory, one main difference that is apparent is the turnover ratio. AEO is turning their
inventory over 7.5 times per year while DKS is turning the inventory over only
3.78 times per year. AEO turns are slightly more than double than that of DKS, which
would generally mean AEO is more profitable and more efficient because they turned
their inventory over more frequently. However, having too little inventory on hand and
turning it quickly may mean that the company may be missing potential opportunities for
sales and greater revenue. This measurement alone cannot chart the differences in the
financial success or failure of these companies. Perhaps, DKS would need to carry more
items or SKUs than AEO in order to lower the inventory turn ratio.
Management at AEO has made their inventory management a priority and created
new positions such as the inventory integrity supervisor. It is evident management found
a key success factor for their company in order to increase the relatively poor inventory
turns that were below 5 only a few years ago. With these personnel changes and a new
focus, the company’s inventory turnover improved as well as the overall financial health
of the firm. In terms of DKS, considerable focus into monitoring their vendor’s
performance and supplier collaboration and partnering has become critical success
factors. Strong vendor relationships have particularly help the company to keep pricing
competitive. Maintain suitable levels of inventories and enhanced accessibility for its
customers, either in stores or online.
Similarities that management in both companies have focused on were the cyclical
and trending demands in their forecasting efforts. AEO significantly differs from DKS
with their emphasis on fashion trends and its impact on store and product layouts.
Forecasting demand is important in advance of purchasing and managing the inventory
(Johnston et al., 2011; Smith and Offodile, 2007). Both retailers use sophisticated
software to manage their inventory in real-time and across essentially all of their
locations and distribution centres. DKS emphasises their ship-from-store option and use
this data to their advantage when applying their forecast. These real-time tracking
systems help each retailer effectively utilises drop shipments and online ordering.

4.2 Retail fashion apparel considerations

Management at both firms understand the impact of inventory management on the overall
customer experience at the retail level, especially in the sport and fashion arena. Simple
aspects, such stock-out policies, can have unintended impacts on their customers’
experiences. For example, a retailer may remove from display an entire set of sizes and
colours if some selected key sizes and colours are no longer available. Policies should be
designed to create a balance between generating sales and mitigating negative customer
368 T. Damron et al.

experience associated with incomplete sets of sizes and colours. For example, if a
customer sees an item in a display window and they search for the item in a key size
(e.g., small, medium) and are unable to find the size, they have a negative customer
experience. Such experiences may deter customers from returning to the store and it may
erode the image of the company.
Another important inventory consideration deals with process design. Managers
generally want to optimise the inventory management allocation process by redesigning
the legacy process. Process redesign is the fundamental rethinking of business process to
bring about dramatic improvements in performance (Caro and Gallien, 2010; Kumar
et al., 2011). Process redesign can be extremely expensive and take a long time to
implement, but it can be beneficial to the organisation for many reasons. Many retails
firms still deal with legacy processes that do not take into consideration varying demand
forecasts. Demand forecasts are projections of a company’s sales for each time period in
a planning horizon. Therefore, under the legacy process, store managers typically and
arbitrarily requesting inventory without knowledge as to whether it will sell, based on
historical demand for similar products. Innovation in inventory managements helps
bridge differences between historic legacy systems and more flexible approaches.

5 Conclusions

Throughout the case study, many different types of operational and inventory
management/decision science techniques are applied to draw insightful managerial
conclusions at the two companies. Much of their inventory systems are automated, yet
many dimensions of inventory management cannot capture some of the decisive factors
that are based on experience and knowledge. For example, it becomes increasingly
important to consider large seasonal variations when estimating demand during lead time.
Extended models are useful for inventory managers, especially those in industries that
experience large seasonal variations, like AEO, to estimate demand during lead time.
Such processes can significantly improve efficiency and lead to cost savings.
In general conclusion, both companies are in a position where their ability to forecast
their inventory needs as accurately as possible directly affects their revenue streams.
With having to guess trends, demand, and configure layouts, both companies are moving
in a positive direction to take control of their inventory and inventory management
through innovative inventory solution. Offering programs like the ship-from-store option
and creating new inventory positions, management at both companies are creating the
abilities to offer their customers high-quality services and products with competitive
pricing structures. Both companies are making a progressive and forward movement
because of their commitment to properly manage inventories, reduce service and lead
times, and maximise value-added activities to their products and services. By using
cutting edge inventory management techniques, both companies have recognised the
latest in inventory management will keep these Pittsburgh-based, global presence
retailers relevant in light of ever increasing competition.
 Inventory control in the retail sector: case studies of best business practices 369

Acknowledgements

The authors would like to thank the reviewers for the valuable contributions and their
input into the final chapter. Peer reviewing and editing are commonly tedious and
thankless tasks.

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