Question

On an early July morning a crowd has gathered for the opening of Trader Joe's newest store location, in Manhattan's Chelsea neighborhood. As shoppers stand in line for the store's opening, they chat about their favorite Trader Joe's foods and discuss the ben- efits the store opening will bring to the area. Why the excitement? Trader Joe's is no ordinary grocery chain. It is offbeat and hip, having elevated food shopping to a cultural experience. Trader Joe's has developed an almost cult following and is one of the hottest retailers in the United States, with 344 stores in 25 states and Washington, D.C. They see themselves as a national chain of neighborhood specialty stores, stocking shelves with a winning combination of low-cost, yuppie-friendly goods. This includes staples such as cage-free eggs and organic blue agave sweetener. They also carry the exotic, such as Belgian butter waffle cookies and Thai lime-and-chili cashews—items difficult to find anywhere else. What is most remarkable about Trader Joe's is that they have found a unique way of addressing the problem that has traditionally plagued grocery stores: carrying large numbers of highly perishable food items in large varieties. A typical grocery store carries about 50,000 stock-keeping units (SKUS), while Trader Joe's carries about 4,000 SKUs. As a result, its stores sell an estimated $1,750 in merchandise per square foot, which is more than double that of Whole Foods. The company doesn't carry much inventory and has little backroom space for storage. However, the inventory that it does carry is carefully selected. Trader Joe's pursues a limited-selection, high-turnover inventory model. One example is peanut butter. Trader Joe's sells 10 varieties, compared to most supermarkets that sell about 40. This has huge implications for inventory turnover. Imagine that a typical super- market and a Trader Joe's both sell 40 jars of peanut butter a week. Trader Joe's would sell an average of four of each type, while the supermarket might sell only one. With the greater turnover on a smaller number of items, Trader Joe's can buy large quantities with deep discounts. It also has lower losses due to shelf life. This makes operations—from stocking shelves to checking out customers—much simpler. Customers accept Trade Joe's limited variety trusting that the company will stock only the best. For example, there are only two kinds of pudding or one kind of polenta. As one

Please read the opening Vignette about Trader Joe's inventory practices. How has it helped you comprehend the dilemmas and practical issues of managing supply-chain inventory.

Please explain in great detail. Thank you!

Answer 1

Here, the vignette tells about two different inventory strategy, first is to have multiple varieties of a product and thus give customers more options. This is the most common strategy used by many groceries. While Trader Joe, which has a cult following, keeps its inventory to a minimum. For example, a typical grocery stores 50,000 SKUs and Trader Joe's carry about 4000 SKUs.

Thus, the dilemma here is regarding the selection of strategy. While Trader Joe is successful and gets more for less due to their popularity and trust of people. With their unique proposition like Belgian butter, cage-free eggs, etc, they can differentiate themselves and maintain quality.

Thus, this vignette explains it well regarding the differentiation. However, if this would succeed in other stores like WholeFoods is hard to say. For other groceries, it becomes a liability to have a high stocking, which increases their cost and occupancy but that is done according to people's demand. While here Trader Joe is doing the opposite and still is very successful.

This brings a few learnings that more than variety, it is the trust that brings customers. A few quality items may be more worthwhile than a lot of them just occupying the space. But still, the practical issue that stays is the risk as people like to have choices. The reason that eCommerce has become more popular, and if this choice or variety is not given to them, then it may repel them from coming to stores.

But as mentioned, it is more upon the trust and credibility that a business is built. For example, if people are unsure about peanut butter, they may buy a brand that its staff would suggest as best. Here, the variety may be of no use. This, along with the fun and friendly nature of the store, and exotic products bring more customers to the store. Thus, just lowering the inventory may not help. Instead, the quality of those and other attractive elements would bring people to the store.

Thus, this vignette has helped understand the quality, trust, and differentiation is more important than increasing the inventory size. This would reduce costs and ensure that customers getting the best is retailers responsibility