Written by Aisha Ahmad (Research Lead), Sophie Aguas, Lam Nguyen, & Vaishnavi Akella
KEY POINTS:
Before COVID-19, retailers optimized inventory with lean strategies, but the pandemic revealed weaknesses.
Department stores are struggling while Walmart thrives.
Retailers are switching from the Retail Inventory Method to Cost Accounting Method for better inventory tracking.
The automotive industry faces challenges due to recessions, rising EV demand, and fluctuating gasoline prices.
Industries are using AI to optimize inventory management and reduce waste.
Retailers are importing goods early to avoid new tariffs and port strike disruptions.
Introduction
The way businesses manage their inventory is changing rapidly, especially in retail and automotive. Before recent disruptions, many companies focused on keeping minimal stock on hand, a strategy known as 'lean inventory.' This approach primarily revolves around managing cycle stock and safety stock. Cycle stock refers to the inventory needed to meet regular customer demand during a replenishment cycle, based on expected sales forecasts. It is the stock actively used to fulfill typical sales orders and is replenished as items are sold. On the other hand, safety stock is held as a buffer to hedge against uncertainties in demand and upstream lead times. Being lean often means placing relatively small order quantities (representing a few days of supply) and holding minimal levels of safety stock, especially when lead time uncertainty is reduced. However, the increased uncertainty in demand and lead times over the past few years has called into question how companies parameterize their inventory control policies, rather than suggesting a fundamentally new method of managing inventories.
The volatility of recent years has exposed the limitations of lean inventory strategies, particularly in the face of supply chain disruptions and shifting consumer demand. For example, department stores have faced significant challenges in maintaining consistent sales-to-inventory ratios, especially when compared to general merchandise stores like Walmart and Target. However, it's important to note that this comparison isn't entirely apples-to-apples. Walmart's ability to turn over inventory rapidly is largely due to its focus on selling groceries, which have a faster turnover rate compared to the non-perishable goods typically sold in department stores.
In response to these challenges, many retailers are transitioning from the Retail Inventory Method (RIM), which relies on retail prices to estimate inventory levels, to the Cost Accounting Method, which tracks the actual cost of goods sold (COGS). This shift provides a clearer picture of financial health and allows for more accurate inventory management. According to a report by Retail Dive, this transition has been particularly evident among department store retailers like Macy’s and Nordstrom, who have moved away from RIM to adopt more precise cost-based accounting methods (Howland, 2024).
Technology is also playing a significant role. Artificial intelligence is increasingly used to forecast demand and optimize supply chains, helping businesses anticipate customer needs and reduce waste. In the automotive sector, the rise of electric vehicles and fluctuating gas prices are forcing companies to rethink their parts and vehicle inventories.
Moreover, businesses are proactively addressing potential disruptions such as new tariffs and port delays. This involves strategies like stockpiling certain goods and diversifying supply sources. These shifts highlight a broader trend towards more adaptable and resilient inventory management practices, as companies strive to navigate an increasingly uncertain market.
Pre-Covid Inventory Patterns:
For years, retail inventory management functioned as a well-oiled machine. Before the COVID-19 pandemic, retailers embraced lean inventory strategies, balancing cost efficiency with demand forecasting to keep stock levels precise. Technologies like Radio Frequency Identification (RFID), Enterprise Resource Planning (ERP) systems, and predictive analytics played a critical role in optimizing inventory. These systems helped retailers minimize holding costs, prevent overstocking, and maintain a seamless supply chain. But when the pandemic hit, the vulnerabilities of these tightly managed strategies became evident.
The pursuit of efficiency was a key operational imperative. Many retailers, particularly in fashion and consumer goods, adopted Just-In-Time (JIT) inventory management, where goods were ordered based on real-time demand rather than being stocked in advance. The strategy worked well when supply chains were predictable. Zara is a prime example of a retailer that mastered demand-driven inventory replenishment, ensuring minimal excess stock while staying responsive to customer trends. However, as reported by The Wall Street Journal, this system came under strain when supply chain disruptions began, forcing companies to shift from a “just-in-time” approach to a “just-in-case” stockpiling strategy during the pandemic.
Forecasting in retail inventory management is only as good as the data that fuels it. Before the pandemic, traditional forecasting models, which relied on historical sales data, market trends, and seasonal patterns, worked well in stable conditions. However, they struggled to account for unexpected disruptions. The pandemic exposed this weakness, revealing how even the most sophisticated forecasting methods could not predict the scale of volatility that followed.
In the post-pandemic period, the stabilization of inventory-to-sales ratios (Figure #1) reflects the recovery of supply chains and retailers’ efforts to adapt to new demand patterns. While forecasting remains a critical tool, its limitations during disruptions have prompted retailers to adopt more resilient strategies, such as diversifying suppliers, increasing safety stock for key products, and integrating real-time demand sensing technologies. These measures ensure that inventory management can withstand future shocks while maintaining efficiency in stable times.
Beyond technology, supplier collaboration was crucial for maintaining inventory efficiency before COVID-19. Many retailers worked with suppliers under Vendor-Managed Inventory (VMI) models, where suppliers had real-time access to inventory data to automate replenishment. This approach reduced stock outs and kept supply chains flowing smoothly.
The pre-pandemic supply chain model relied heavily on closely interwoven networks, as detailed by TechTarget. While this created a streamlined system, it also introduced risk—when one part of the chain broke down, delays cascaded through the entire system. Meanwhile, IKEA’s regional sourcing model, as highlighted in Financial Times, showcased how a diversified supply strategy could offer resilience against disruptions.
With the growth of e-commerce, retailers were already transitioning toward omni-channel inventory synchronization before the pandemic. Integrating online and offline inventory allowed for fulfillment options like buy-online-pick-up-in-store (BOPIS) and ship-from-store models, which were becoming industry standards.
However, the pandemic highlighted gaps in these systems. The Forbes report emphasized how many retailers struggled to quickly shift store inventory to meet the surge in online orders, exposing inefficiencies in pre-pandemic inventory synchronization. These challenges forced retailers to invest further in omni-channel solutions, ensuring that future disruptions could be handled with greater flexibility.
While lean inventory management was the dominant strategy, some retailers kept buffer stock for essential goods to hedge against demand spikes. However, globalized supply chains meant that most retailers operated with minimal reserves, a vulnerability that became evident when supply chain disruptions hit.
Pre-pandemic retail inventory management was defined by efficiency, technology-driven forecasting, and supplier collaboration. The pandemic forced companies to rethink these strategies, leading to temporary stockpiling and a reassessment of global supply chain risks. However, as supply chains have stabilized, retailers are returning to their optimized JIT strategies while incorporating lessons from the crisis, such as better demand sensing and regionalized sourcing.
Retail Stores
As consumer trends continue to fluctuate and evolve, their shifts in shopping habits have greatly influenced the retail store landscape. One significant change in the retail market has been the downfall of department stores. As big box retailers and general merchandise stores like Walmart and Target become increasingly successful, department stores have been struggling to survive. General merchandise stores have adapted to rapidly changing consumer trends easier than department stores, expanding their offerings to include a wider variety of products, such as groceries and household essentials. Furthermore, general merchandise stores are also able to attract shoppers with their promises of convenience and lower prices, something department stores struggle to adjust to.
This shift in consumer preference became even more evident during the pandemic, when general merchandise stores were able to remain open due to their offering of essential goods such as groceries. In contrast, many department stores had to close due to their offering of non-essential goods, such as dress clothes, which had a lower demand during the pandemic as many employees worked from home.
In addition, as inflation worsens, the retail industry is further “split in two,” where general merchandise stores that are focused on inexpensive items are succeeding, and luxury brands, which are often offered through department stores, bring in less customers as less consumers can continue to afford finer items.
This shift in consumer preference is notably clear when examining the general trend of inventories/sales ratios in department stores and general merchandise stores. The graphs below indicate the Retail Inventories/Sales Ratio for Department Stores (Figure #2) and General Merchandise Stores (Figure #3). It is important to note that within FRED, the graphs’ source, department stores are considered a subcategory of general merchandise stores. Thus, the General Merchandise Stores graph contains data from department stores.
One noticeable difference between the two graphs is that the inventories/sales ratio for General Merchandise Stores has a slow, large decrease from 2000-2010 from 2.0 to around 1.4, which is where it mellows out. This is observed due to the increase in popularity of big box retailers like Walmart and Target, which became increasingly prevalent in the 2000s.
Further examination of the period 2018-2024 highlights another stark difference between the two graphs: a steep spike in the inventories/sales ratio for department stores at the beginning of the Covid-19 Pandemic in 2020. This is due to department stores having to suddenly close in-person locations, while general merchandise stores were able to remain open by selling essentials, like groceries.
Another especially important detail to acknowledge in these graphs is that department stores and general merchandise stores have starkly different “normal” and “stable” inventories/sales ratios. Department stores have recently settled at an inventory/sales ratio of 2.0, while general merchandise stores have recently settled at an inventory/sales ratio of 1.3. This indicates that general merchandise stores are able to turn over more inventory into sales than department stores. One contributing factor to this lower number would be the fact that many general merchandise stores offer perishable goods, such as food, which should not be excessively stocked, lest they spoil and become unusable to the company. In contrast, department stores generally offer more non-perishable goods such as clothing, which can be stocked in higher quantities for longer periods of time.
Note that Figures #2 and #3 display the same data as Figures #4 and #5 but cover a smaller time period. They are a “zoomed in” version of Figures #2 and #3.
As a result of the trends on inventory changes, retailers have experienced different practices and scenarios to cope with inventory management while meeting sales. For example, in a New York Times article written by Jordyn Holman, Target saw lower profit in sales and a larger amount of unsold inventory during the holiday season, which resulted in their stock plunging 21% (Figure #6). One reason behind the lost profit was due to inflationary pressures, where recent higher prices have caused consumers to shop less for high-margin goods. Secondly, Target sells a less range of products with higher prices compared to Walmart, having more consumers shop with them. Importantly though, Target decided to stock up on their inventory early, to prepare for the port strike. Inventory for home decor sold well, while expensive items such as Televisions remained in inventory, leading to lost sales.
Furthermore, retailers practice different kinds of accounting methods to rely on their inventory in correlation with their prices. It was recently shared by Daphne Howland from the Retail Dive that department store retailers such as Macy’s and Nordstrom used to rely on the retail inventory method (RIM). This method relies on retail prices to predict inventory levels. In other words, RIM estimates the value of inventory without counting each item, but rather using prices to define how much there is. The issue present is that RIM fails to acknowledge that discounted prices cannot accurately define how much inventory is left. Also, this method is presumed to be old since technology, such as computers and barcodes, have come into place.
Hence, retailers are now focused on transitioning into the use of the Cost Accounting Method. This method uses data to track costs, reflecting on the cost of goods sold to account for inventory. Retailers believe that this is a better method in modern times as it provides a clear view of inventory and profit margins since COGS for finished goods inventory does not change.
Consequently, when retailers use the RIM method for inventory planning, it means that they need to follow trends to see what consumers want. If too much inventory is ordered, there will be leftovers. If too little inventory is ordered, there will be missed sales. For that reason, inventory planning with the cost method means that inventory value is the same because it was based on the cost to pay for it. If the price is marked down for an item, the inventory value of the item will decrease and be sold. The graphic (Figure #7) below demonstrates a comparison between the two methods.
As a result, when Macy’s switched from RIM to the cost accounting method, they saw a difference in numbers for their 2024 annual reporting compared to 2023, as they saw lower profit margins. Nordstrom saw the change affect their discount prices, which resulted in different financial outcomes in their annual reporting. However, Nordstrom shared that the new method made it easier to count profit per item, helping them set better prices for customers. Even though the change from one method to another impacted annual reporting results, it ensured the cost accounting method was more accurate and stable, providing correct results.
The Wall Street Journal has reported that CVS is closing three out of thirty-three of their warehouses to streamline operations in order to implement in-store fulfillment. With 9,000 retail locations and 85% of the U.S. population living within 10 miles of a store, this change enhances proximity to customers and improve service delivery through online orders for pickup in store. This practice helps CVS reduce inventory and inventory holding costs (Figure #8).
Dollar General is also taking on a similar practice. Liz Young from the Wall Street Journal has reported that Dollar General is closing seven warehouses and plans to shut down an additional five this year to reduce costs and improve inventory flow. Concurrently, the company is opening new distribution centers in Arkansas and Colorado to lower transportation expenses and expedite product delivery to stores. Changes in warehouse sorting processes are being implemented to accelerate the flow of goods to stores. This allows store employees to restock shelves more quickly, enhancing product availability for customers and potentially increasing sales. Lastly, the company is tightening on-time inventory delivery requirements to ensure that products are available on shelves when customers need them. This effort has resulted in more shipments arriving on time and in full in the latest quarter compared to the same period last year.
Online Retail (E-Commerce)
As online retail grows in popularity since the pandemic, retailers have been taking steps to make sure inventory is available for online orders. According to a Wall Street Journal article written by Suzanne Kapner, physical retail stores don’t hold a lot of inventory because retailers are holding it for online shopping. As a way to compete with Amazon, retailers are limiting in-store selection. Retailers who practice this hold vast amounts of inventory in their distribution/fulfillment centers to deliver to online customers. The figure below demonstrates just how a percentage for online assortment is found in physical stores (Figure #9).
Automotive Industry
Typically, within the automotive industry, we don’t see fluctuations in inventory as there is no main shifter that influences its demand. Over recent years, there has always been a steady increase in auto parts that are used in motor vehicles, although there were interventions. In 2008 and 2020, recessions occurred in the United States, and many are aware that they affected the purchasing habits of all customers, including motor vehicle customers. The 2020 recession also played out during the pandemic, during which there was no need for vehicle repair, the reason for an impactful change. As seen below (Figure #10), the only significant change in sales occurred during this period. Inventory accumulated at a significantly faster rate than sales, which is the reason for the rise in the graph. This can be expected in future situations similar to this one.
With the introduction of electric vehicles, one would expect the current demand for regular automotive parts to decrease for this reason as well, but it has not been the case in recent months. With sales significantly decreasing in recent weeks, Tesla is currently making plans to decrease their cost of production, in order to make the overall cost more affordable. Tesla’s market value has also greatly increased with the election of President Trump, which may impact demand for inventory in the coming years.
One factor especially influencing the choices of these buyers is the well-known issue of rising prices of gasoline. This has led to an increase in manufacturing and producing electric vehicles with increased quality and efficiency. Precedence Research says the current EV parts market size is at 205.82 billion dollars as of 2024. This number is projected to be at an estimated 1566.24 billion dollars by 2034, which will grow at a Compound Annual Growth Rate (CAGR) of 22.5%. With a growing number of EV charging stations, market demand also includes companies and the government when building charging infrastructure.
Because of this switch in the industry, auto part dealers have been facing the struggles of changes in the type of inventory they will continue to stock. With 15 new products scheduled to enter the market, Cox Automotive suggests that EV will contribute about 10% of total sales in the next year. They are also predicting that in the next year, 1 in 4 vehicles will be electrified in some way, setting new records.
AI and Inventory
As AI is continuing to grow in popularity, many industries including those involving inventory are investing in ways to use AI to help create efficient operations.
Walmart’s Global Tech has shared that they have begun using an AI-driven inventory management system to track real-time customer demand across 4,700 stores, fulfilment centers, and distribution centers to ensure accurate replenishment for stock. These AI algorithms are used to maintain optimal inventory levels in order to prevent extra inventory and shortages. The AI technology also practices supply chain optimization, enhancing efficiency of supply chain operations by setting truck drivers up with orders, to ensure last-minute delivery with shorter transportation routes. This helps efficiently handle the speed of inventory while providing timely deliveries.
Sotira is a company that helps brands manage their unsold inventory without having it go to waste. Through an AI-powered surplus inventory management platform, Sotira helps these companies offload and sell their inventory. In a Freight Waves article written Noi Mahoney, Amrita Bhasin founded the company to specifically help with selling excess grocery, health & wellness, and cosmetic items. It is found that reverse logistics or surplus procurement is a $550 billion industry that lacks automation. Hence, his company automates the processes of bills, invoices, checks, and transactions. Besides, Sotira helps reduce the waste for $163 billion worth of unsold inventory. This inventory is sold on Sotira’s AI-powered marketplace, where companies add in their capacity models and warehouse management systems to share with a network of buyers. This model of selling unsold inventory is fast with customers from the Midwest and Northeast. As previously mentioned in an ISCRO article titled US Warehouse Growth and Current Situation, Michigan recently has seen an increase in warehouse establishments due to e-commerce, COVID-19 disruptions, and the post-pandemic.
Current Situation with Inventory
Recently the Trump administration announced that a 25% threat for tariffs will be put on goods imported from Mexico, Canada, Colombia, and China. This threat is causing importers to bring in vast amounts of items before the tariffs take place. "The Impact of Trump's Tariffs on Global Trade", discusses this issue in more depth. Along with the tariff threats, importers have previously brought in advanced inventory due to the port strikes.
Due to the disruptions of the Port Strike, Retailers decided to bring in cargo prior to the disruptions to have inventory stored in warehouses and distribution centers. Retailers decided to take this approach because they wanted to prepare ahead for the holiday season so that consumers can have their goods stocked in stores. The strategy helped Retailers retain their 1-1 ratio for inventory in January 2024 (Figure #11).
Along with port interruptions, retailers have also taken on preparation with Trump’s Tariffs. Freight Waves has reported that as of late 2024 to present, U.S. container ports have seen increased imports. This is due to the avoidance of tariffs on goods from China and other countries, leading to continuous front loading by retailers. However, this practice of front loading, retailers have seen increased warehousing costs, and there's uncertainty on future tariff changes, including potential increases on China tariffs. Hence, a projected amount for TEU loads is to be seen in the months ahead (Figure #12).
Conclusion
In summary, inventory management in retail is evolving, driven by recent market disruptions and the need for more resilient practices. The shift from lean inventory models to more precise accounting methods and the integration of advanced technologies like AI are helping businesses better forecast demand and optimize supply chains. With challenges like fluctuating consumer demand, new tariffs, and supply chain delays, companies are adopting strategies to reduce risks and adapt to uncertainties. As the market continues to evolve, businesses are prioritizing adaptability and endurance to navigate the complexities for inventory in retail.