Page 193 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes By the beginning of the 21st century, reports appeared about how Nordstrom was finally
willing to speed up the implementation of a perpetual inventory system, an initiative
started by Whitacre.
The implementation of the system was expected to be completed by 2002. Blake Nordstrom
said, “We recognize that Nordstrom was founded on the simple idea of taking care of
customers. We want to reconnect with them through improved merchandise execution.
Our focus is taking appropriate steps toward implementation of a perpetual inventory
system in 2002.”
The above initiatives made many analysts comment that Nordstrom was all set for a
revival. Therefore, the news of profits for 2001 declining by an astounding 50% over 2000
was seen as a very disturbing development. The share price had fallen from a high of
$44.81 in 1999 to just $19 in mid-2001.
What was even more appalling was that Nordstrom had not fared well on what it considered
to be its core competency, customer service. In 2001, Neiman Marcus was ranked the
leader among all department-store chains in the US with respect to customer service.
Skeptics reportedly felt that Nordstrom was making yet another round of empty promises.
Considering that it had been talking of reaping the benefits of the new inventory system
for quite a few years without any result, the skepticism seemed quite logical. Under these
circumstances, the company’s healthy results for the second quarter of 2002 provided a
long-awaited respite from a series of negative developments. Profits stood at $65.9 million
as against $36.3 million for the corresponding period in the previous year.
Questions
1. What losses did Nordstrom suffer due to the inventory mismanagement?
2. What was Blake Nordstrom’s most interesting move to put the company on the
right path?
Source: www.icmrindia.org

Self Assessment

Fill in the blanks:

1. ABC inventory classification and related control techniques were developed originally
for ....................... systems prior to the widespread use of automated inventory record
keeping.

2. If the inventory is purchased with cash, there is an ....................... cost of the funds.
3. ....................... costs constitute all the costs of holding items in inventory for a given period
of time.

4. The ....................... classification is applicable largely to spare parts.

12.2 Inventory Control Models

Given the significance of the benefits and costs associated with holding inventories, it is important
that the firm efficiently control the level of inventory investments. A number of inventory
control models are available that can help in determining the optimal inventory level of each
item. These models range from the relatively simple to the extremely complex. Their degree of
complexity depends primarily on the assumptions made about the demand or use for the item
and the lead time required to secure additional stock.

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