Walmart, Target, Macy’s and Kohl’s are among retailers that have recently said they are canceling some orders to better balance inventory levels, a replay of a strategy used at the start of the pandemic.

Other steps retailers are using to clear inventories as spending has slowed on some non-discretionary categories are employing markdowns and packing away products for the following year. The elevated inventory levels also reflect intentional over-buying to mitigate shortages and the easing of supply chain constraints.

One risk of canceling orders is straining or damaging relationships with trading partners. After the pandemic arrived, many retailers were called out for not honoring their contracts to pay in full for goods that were in production as well as for requests for postponements, discounts or delays in payment. Several issued statements assuring their commitments, with Levi’s and Gap offering low-cost financing to factories to weather payment delays.

 

The other risk is not having enough inventory to meet demand. Many retailers and brands indicated they missed sales opportunities during the 2020 holiday season due to overly-lean inventories as demand recovered more quickly than expected.

Second-quarter analyst calls found retailers aware of potential inventory shortfall risks from overly aggressive actions.

Christina Hennington, Target’s EVP and chief growth officer, said steps being taken by the discounter’s buying team include “rigorously reforecasting expectations for the balance of the year and beyond and determining where to reduce future receipts and orders. In some cases, it meant working with vendor partners to reduce our fall receipts in light of our updated expectations. It also meant quickly building compelling promotional plans to drive unit velocity for product we already owned, all with a focus on providing great value and generating excitement for our guests.”

John David Rainey, Walmart’s EVP and CFO, said it had cleared most summer inventory, was reducing exposure in electronics, home and sporting goods, and canceled “billions of dollars in orders” to realign inventories. He said, “Our actions in Q3 will allow us to make significant progress toward rationalizing absolute levels and mix, which will enable our stores to be well positioned ahead of the holiday season.”

 

 

DISCUSSION QUESTIONS: Should order cancellations be a rare, last-resort option or regularly used as a tool for rebalancing inventories? What lessons, if any, should the order cancellations at the start of the pandemic offer?

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