Inventory Management Strategies for Global Expansion: A Case Study

Background
Carl Dirkowitz is the CEO of BMC, a U.K.-based discount retailer worth GBP 10 billion. BMC sells general merchandise such as clothing, household items, groceries and furniture. The company has over 300 stores and 15 distribution centres in the U.K. Its success led the company to expand internationally. In 2013, it expanded into Australia, where a few of its British competitors, such as CASTA, have had several stores open since 2004. In its first three years of operating in Australia, BMC has experienced a loss of GBP 5 billion. Carl has been confronted with questions from shareholders and the executive team about the supply chain challenges recently reported in the media. Angry shareholders are pondering the massive loss the company has faced and are demanding answers.

Carl and BMC Australia President Gary Brooks expected to be profitable during the first year of operation. Carl introduced a fast and aggressive launch schedule that opened fifty stores within one year of launching into the Australian market. Now the company’s shareholders are calling for BMC to pull out of the country. At the last meeting, Carl said, “We have not been able to get it right since starting operations in Australia; we did too much, too quickly.” Carl is trying to see what steps he can take to increase BMC’s bottom line. All eyes are now on him as he faces a tough decision about the stores operating in Australia. 

The Launch into Australia
In 2013, Carl received some information that CASTA was interested in purchasing Taylor’s, an Australian chain of retailers. Acting on this, Carl purchased the leaseholds to all fifty Taylor’s stores and planned on aggressively opening BMC stores in the former Taylor’s locations. As
Taylor’s occupied retail space in several cities across Australia, Carl thought the company could take advantage of the existing market and anticipated that sales would be robust, just as they had been in the U.K. 

 

To prepare for the Australian store openings, Carl depended on his team of U.K. sales managers, buyers and Gary to prepare Australian sales projections. The team at the U.K. headquarters used past British sales and the advice of Australian vendors to guide buying stock. The vendors merely reiterated what the executives at headquarters thought: locals would shop at BMC because it was a well-known British brand, plus it had the cushion that it was taking over the void left by Taylor’s. Carl asked his team to order inventory, purchasing more stock than the projected first-year sales. All the merchandise was delivered to the distribution centres at the same time.

The Launch into Australia

 

The Empty Shelves
Carl was hoping to hear there were long lines of shoppers waiting to get into the newly launched stores, and he got his wish. With the initial excitement of a new British retailer in Australia, they flocked to BMC. Carl didn’t anticipate what would happen next, however. Shoppers complained that the prices were too high compared to CASTA and other Australian competitors, and they were not impressed with the BMC merchandise. The worst news, though, came when he was informed about the stock issues.

As Australians shopped at the stores during the launch, there was too little inventory to meet the demand, which resulted in stock-outs and customers seeing empty shelves. Inventory shortages were common throughout all fifty stores. One customer tweeted, “I can’t believe this is the grand opening and I can’t find a box of tea or a bottle of sunscreen. The shelves are bare. What’s worse? I can’t find anything that’s made in Australia. We love to buy Australian-made products.” 

 

Distribution and Inventory Chaos
Carl spoke to Gary and Australian Distribution Manager Sheryl Johnson to investigate this issue. Sheryl worked for Tame Logistics, which was contracted by BMC to manage its distribution centres. Over a call with Carl, Sheryl explained, “There are products at both of our two distribution centres. I can’t believe how many times I have mentioned in conference calls that the new inventory system we have is not allowing us to process the items, so we cannot send them to the stores. Our warehouses are overflowing with stock. All the goods have come in at the same time. It’s one big bottleneck. We don’t know what to do with them. I don’t have enough warehouse staff to handle the goods. I have asked my assistant to look into renting some warehouses close by to  store some of the stock. Who knows how we are going to track that. We have to figure out a way somehow. What are we supposed to do?”

Carl told Sheryl, “This new ARP inventory system is used worldwide. Even CASTA uses it. What do you mean it is not working?” Sheryl asserted, “The warehouse associates are telling me the bar codes are not matching what is in the system. I don’t know where things are going wrong. Our Tame Logistics warehouse system doesn’t seem to be working well with ARP. I don’t even know if the vendors are the ones making mistakes. The team in the warehouse is working night and day to figure this out. The item numbers are wrong and the descriptions of some of the stock are not clear and do not make sense to us, so my team members and I are confused about whether we have something in stock or what to order. The stores also find it hard to search for items to order. There must be something going on with data entry somewhere, as we are getting dimensions, currencies and measurements mixed up on our end. Things that should be in Australian dollars are in the system as British pounds and things that should be in centimetres are in inches. If any data is not entered correctly or if something is missing, like the model number,  the system does not allow us to process it. Here is an example: one of my receiving staff told me that twenty boxes of diapers came in by truck. The system showed us there were supposed to be ten boxes of diapers with two hundred diapers in each box, but we got twenty boxes with one hundred diapers in each. This meant the shipment did not exist in our software system, and we couldn’t process it. If we can’t process the goods, we can’t send them to the stores. Now we have such a backlog that one of my supervisors told me some of the warehouse associates needed space in the warehouse and sent unprocessed goods straight to the stores.”

The Empty Shelves

The New Inventory System Hiccups
In the U.K., BMC used an existing inventory forecasting system that was customised and adapted over several years, specifically for BMC’s operations. For the Australian stores, Carl purchased ARP, a new, off-the-shelf inventory and sales forecasting system that the company had never used before. Carl thought using this new system was a good idea, as ARP had stellar reviews by many successful corporations; he believed it was the way to move forward now that BMC was expanding. Upon further investigation, the IT management team told him it realised that ARP needs years of historical data to provide any useful sales forecasts. Also, sometimes two pages of data needed to be entered for one product to have the necessary information to work properly. They now knew they needed this data, and it was too late to go back to the old system. 

After going back and forth with the Australian executive team, Carl and Gary realised that ARP had flawed data and that information about each item had to be entered correctly. Carl decided to continue opening the stores, as “the show must go on”—even if that meant some stores were
opening with empty shelves and other stores had too much merchandise. It took several weeks to enter the correct data into ARP. By the time Gary and his team fixed the inventory challenges, the number of BMC shoppers was decreasing. Months went by with most stores having more
employees in them than shoppers. After three years of operating at such a huge loss, what was he supposed to do? 

 

Learning Outcomes
This case study relates to the following learning outcome from the module Inventory Management in the course Global Value Chain:
• Build inventory systems through a strategic approach to control inventory levels and financial risks when exporting and/or importing on a global basis.

 

Case Study Questions
1. What could Carl and his team have done differently about BMC’s inventory management challenges?
2. Describe the advantages and disadvantages of a large retailer using inventory management software systems, such as BMC’s use of ARP.
3. One of the inventory management strategies used by BMC was to base inventory levels on forecasts. What alternative strategy would you have recommended to Carl and his team?

Forecasts are educated guesses; when used for a period even up to a year, they can be highly inaccurate. Using forecasts along with customer demand is a better way to maintain inventory levels. This will help align inventory levels with the items customers are purchasing. Having a rapid replenishment strategy to react to demand signals quickly and efficiently (requiring connectivity with the suppliers and freight forwarders) is the best way to respond to an unforecastable launch.