Inventory Analysis
The paper contains an inventory analysis of Wal-Mart Stores Inc. and one of its competitors Target Corporation. Wal-Mart Stores Inc. operates a chain of retail stores across three segments: Wal-Mart US, Sams Club and Wal-Mart International (Yahoo Finance). On the other hand Target Corporation operates as a general retailer in US and Canada (Yahoo Finance).
In 2014, Target Corporation had an inventory turnover of 6.04 times (50,039,000/8,278,000) as compared to Wal-Mart Inventory turnover of 7.98 times (358,069,000/44,848,000) indicating that Target Corporation is turning over its inventory more slowly than Wal-Mart. Over the same period, Target Corporation had an inventory holding period of60.38 days (8,278,000/50,039,000 x365) as compared to Wal-Mart inventory holding period of 45.71 days (44,848,000/358,069,000 x365). This indicates that Target Corporation is underperforming as compared to Wal-Mart.
Target Corporation can improve its profitability by matching its inventory turnover and inventory days to match those of Wal-Mart. Target Corporation can achieve a similar level of inventory turnover to that of Wal-Mart by reducing the amount of inventory held. The required level of inventory can be calculated as follows:
X = 6,270,551
Target Corporation would have to reduce the inventory held by $2,007.449 million from the current inventory level of $8,278 million. This would represent a 24.25% reduction in the current inventory.
$ 000
Current Inventory levels 8,278,000
Projected inventory levels 6,270,551
Reduction in inventory levels $2,007,449
Carrying cost 25%
Annual savings 501,862.25
Target Corporation can increase its profits by $501,862, 250 per year by simply matching its inventory turnover ratio and inventory days to match those of Wal-Mart. Target Corporation may be underperforming as compared to Wal-Mart. Other than low sales, Target Corporation low inventory turnover may be because of holding a large volume of obsolete inventory, or poor management of inventory (Shim, 2007, p.72). Target Corporation can adopt better inventory management techniques such as Just in Time (JIT) Inventory management technique or use of ABC inventory management technique (Shim, 2007, p.72).
Carrying too much inventory than is necessary to support sales results in high carrying costs and increased risk of obsolescence, theft or damage of goods (Shim, 2007, p.72). Target Corporation like other Businesses can realize significant cost savings by better managing their inventory. The analysis indicates that Target Corporation has a potential of reducing its inventory carrying costs by as much as $501,862, 250 per annum.
Works Cited
Shim, Jae K., and Joel G. Siegel. Handbook of Financial Analysis, Forecasting, and Modeling.
Chicago, IL: Wolters Kluwer/CCH, 2007. Print.
Yahoo Finance. "TGT Income Statement | Target Corporation Common Stock Stock - Yahoo!
Finance." TGT Income Statement | Target Corporation Common Stock Stock - Yahoo! Finance. Web. 08 Feb. 2016.
Yahoo Finance. "WMT Balance Sheet | Wal-Mart Stores, Inc. Common St Stock - Yahoo!
Finance." WMT Balance Sheet | Wal-Mart Stores, Inc. Common St Stock - Yahoo! Finance. Web. 08 Feb. 2016.
