Information Technology and Inventory Management: The Case for Contemporaneous Speculation in Retailing Channels

Abstract

Information technology is changing the nature of retailing. The Internet is socializing customers to expect more for less, and more quickly, as well. However, interorganizational information systems also provide the basis for store-based retailers to meet increasing customer demands for lower prices, custom product configurations and immediate product availability. Using modern information systems, retailers are now able to meet stringent customer expectations for quick delivery and value-based pricing through scanner-based computer inventory management processes that lead to very quick, near instantaneous, inventory replenishment. We characterize this near-instant identification and satisfaction of consumer needs with the aid of information technology as contemporaneous speculation, and this inventory management process represents a reconsideration of the long-practiced principle of postponement/speculation in retail channels. In the past, retailers used to deal with risks about uncertain customer requirements by speculating upon finished inventories placed near the point of purchase. Speculative inventories can effectively prevent business losses due to stock outs, but speculation is a costly inventory management approach. Postponement is a risk reduction strategy, where costs of meeting uncertain consumer demand are reduced by delaying product design, production and distribution commitments until firm orders are secured. With appropriate information technology in place to manage supply chain operations supporting retailing, managers no longer need to speculate on forecasted expectations of consumer requirements, nor to postpone costly product commitments. With the appropriate information technology integrated into supply chain operations, retailers are now able to react to consumer demand patterns in quick and nimble fashion. Retail managers can now speculate contemporaneously on the real time demands and expectations of retail customers with the aid of interorganizational computer systems that serve to link supply channel partners.