Measuring Flow: Inventory, Service and the Evidence Problem

On 18 May 2022 Target reported its results for the first quarter of the year. Its operating margin was far below plan, and the company blamed higher freight and fuel costs and the cost of handling more stock than it needed. Its inventory at the end of the quarter was about $15.1 billion, about 43% more than a year earlier (company, reported), and its shares fell by about a quarter that day (reported). Three weeks later, on 7 June, Target warned again. It would mark down goods, remove excess inventory, cancel orders with suppliers and absorb higher freight costs rather than pass them on, and it cut its outlook for the second-quarter operating margin to about 2%, from the roughly 5.3% it had given on 18 May, while still expecting about 6% in the second half (company). Its second-quarter margin came in at about 1.2% (company, reported).

The cause was not a mystery. Target had pulled imports forward through 2021 to beat the congestion at the ports, and its mix leaned more than Walmart's or Costco's towards discretionary goods: home furnishings, electronics, apparel and outdoor equipment. In the spring of 2022 American spending rotated quickly from those goods back to services and essentials, and inflation squeezed the budgets of its shoppers. Goods ordered for a demand that had passed arrived anyway. Target was not alone; Walmart's inventory at the end of its own first quarter was about 33% higher than a year earlier (reported). Target was simply the first to clear its stock so sharply and so publicly, taking one quarter's loss to make room for the holiday season.

What makes the case useful here is that the problem was visible in the numbers months before it was visible in the profits, if the numbers were read the right way. An inventory figure rising by 43% looks like confidence in a growing business when it is compared with last year's inventory, and like a warning when it is compared with sales. This chapter is about the definitions that decide which of those readings a reader makes: of inventory, of service, of revenue and of the claims that supply-chain companies make about themselves.