Suppose you could receive a large quantity discount for a product that you regularly use, but the discount requires you to buy several months’ supply of it and make a large up-front payment.

Would you take the quantity discount? Companies face similar decisions because firms pay a price for tying up money in inventory sitting on their shelves or elsewhere. Selecting the right products to sell, understanding customers deeply, and pricing products smartly helps companies keep their inventories low as the following example from Target indicates.

Target Leverages the Internet of Things to Respond to the Changing Retail Landscape^*

The retail business is changing every day. Customers are no longer seeing a distinction between online and offline shopping, so retailers are reconfiguring how they quickly get products into the hands of customers wherever they are. Many forward-thinking retailers like Target are turning to the Internet of Things (IoT) for help.

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The IoT connects computers, networks, and equipment systems that can communicate and share data in real time without human interaction. At Target, stores and warehouses are being equipped with innovative technologies that help the company better track its inventory to avoid in-store stockouts and help fulfill orders from its growing e-commerce business.

For example, Target increasingly uses smart shelves with radio-frequency identification (RFID) chips. When customers purchase a product, updated inventory data is sent to the warehouse. Alerts inform employees when they need to restock shelves and order more product. Because of this technology, Target is able to replenish its inventory more quickly, which reduces the amount of item storage space the company needs while simultaneously keeping shelves stocked and ready for business.

This new approach also allows Target to speed up delivery of online orders by filling them with merchandise from stores close to a customer’s home, cutting down on shipping time and costs. Since its stores are restocked quickly, there are no concerns about not having enough inventory to supply both in-store and online shoppers.

These IoT innovations have had a profound impact on Target’s supply chain efficiency, sales, and profitability. RFID-enabled stores have decreased back-room inventories to a fraction of previous levels, reduced stockouts by 40%, and increased sales by 4%. Additionally, during the 2018 holiday season, Target filled nearly 70% of online orders through its retail stores.