Tuesday, January 29, 2013

Mervyn’s: Lessons in inventory management and information technology

Mervyn’s managed a chain of department stores across America from 1949 until 2008. In 1994, it was featured in the McKinsey Quarterly for its innovation in information technology – its Planned Store Inventory (PSI) system. Unfortunately, Mervyn’s has since filed for bankruptcy. However, the creation and use of its PSI lends much insight to other companies and their inventory management.

The pre-existing inventory system at Mervyn’s was ineffective; the system was wasteful, inadaptable, and rigid. Mervyn’s distributed inventory based on average sales, deciding the allocation of sizes, colors, and styles of each particular product based on clusters of 8 to 12 categories of stores. This inventory forecasting method caused many problems, however. Individual stores could be vastly different than the other stores grouped in their cluster, creating an inaccurate distribution of sizes and styles of products. Using averages also did not accommodate for changes in demand due to advertising, essentially wasting money when stores advertised and promoted items which they then did not have enough of in stock. Lastly, by basing the inventory system on past sales, Mervyn’s made it almost impossible for any store to break out of a rut. 

Mervyn’s realized that a new inventory management system would be required in order to remain competitive. They approached the problem in a very creative and collaborate way. Ideas were shared in an informal manner and changes were made using judgment and reasoning, similar to the methods described in this week’s reading “Managing Inventories – Reorder Point Systems.” Mervyn’s also had a philosophy of “build it, use it, fix it.” Any changes to the system were suggested, then tested and evaluated. For instance, the prototype went live in October 1, 1992, but changes were continually made from November 1992 until January 1993. This allowed for a transfer of expertise in the change process; suggestions for improvements continued to arise from employees throughout the company, and the system would be re-released with these modifications.

With the new PSI system, which distributed a mix of products and sizes matched to a particular store, Mervyn’s was able to sell more products with less inventory. At the same time, the company was able to reduce the sales lost because of out-of-stock goods. It exemplifies an information technology system built on collaboration, flexibility, and reason. Using shared experiences in the company and trial-and-error modifications based in judgment and intuition, the PSI system allowed Mervyn’s to tailor its inventory and distribution to each particular store thus adding millions of dollars to its profits. 

Questions to consider:
  1. In what ways can Mervyn’s approach to inventory management be adopted by other companies? Are there any ways in which its approach was unique to Mervyn’s? 
  2. The McKinsey Quarterly article was published in 1994. Mervyn’s has since gone out of business and much has changed in the fields of information technology and inventory management. How do you predict an article would be written today as a reflection of not only Mervyn’s status over the past 19 years but also as an update on inventory management information technology systems?

Dvorak, Robert, Derek Dean, and Marc Singer. “Accelerating IT innovation.” The McKinsey Quarterly 4 (1994): 123-135. http://www.mckinseyquarterly.com/Accelerating_IT_innovation_60.

Freeland, Landel, and Weiss. “Managing Inventories—Reorder Point Systems.” Darden Business Publishing, 2000.


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