The following discussion describes a new inventory system used by J. C. Penney 3

Question

The following discussion describes a new inventory system used by J. C. Penney39:

In an industry where the goal is rapid turnaround of merchandise, J.C. Penney stores now hold almost no extra inventory of house-brand shirts. Less than a decade ago, Penney would have stored thousands of them in warehouses across the U.S., tying up capital and slowly going out of style.

The entire program is designed and operated by TAL Apparel Ltd., a closely held Hong Kong shirt maker. TAL collects point-of-sale data for Penney’s shirts directly from its stores in North America for analysis through a computer model it designed. The Hong Kong company then decides how many shirts to make, and in what styles, colors, and sizes. The manufacturer sends the shirts directly to each Penney store, bypassing the retailer’s warehouses and corporate decision makers.

a. Discuss how this case illustrates the concept of the opportunity cost of capital.

b. How does this innovation also help in demand management?

Explanation / Answer

a) The concept of opportunity cost could be explained as follows,

The cost or sacrifice one person or an economic unit incurs in selecting one opportunity from a set of two or more available opportunities could be termed as opportunity cost.

Here, J.C. Penney's store previously used to store or invest a lot of capital in their inventory stocks or warehouses. But now-a-days they are not doing so and is in direct contact with the TAL Apparels to provide them with a more varied, innovative and customer oriented products.

Hence the concept of opportunity cost of capital , which was previously pre-invested and stored in warehouses, in now being effectively, appropriately and targeted utilized by the J.C. Penney.

Hence the opportunity cost of capital of J.C. Penney is that, it was the opportunity of keeping inventory with a capital stock in warehouses that J.C. Penney sacrificed for the new opportunity of having innovative and fresh stock of products from TAL.

b) Innovation helps to upgrade fresh stock of products according to the level of demand or updated level of demand according to the different kinds of merchandise. Innovation also keeps the company J.C. Penney attract different customers for different categories of products or designs accordingly.

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