Improving Store Liquidation

Craig, Nathan; Raman, Ananth

doi:10.2139/ssrn.2266109

Cited by 10 publications

(9 citation statements)

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“…Our model extends the classical newsvendor framework by providing a liquidation option at an intermediate point. This can correspond to a discontinuation of a division or product, or a going out of business sale (Craig and Raman 2013). Paralleling the standard "salvaging" assumption in the newsvendor setup, we assume that the entire leftover inventory at t = 1 can be liquidated at a price s that is a-priori known, and independent of the quantity and first period demand.…”

Section: Discussion Of Modeling Assumptionsmentioning

confidence: 99%

Is Operating Flexibility Harmful Under Debt?

2017

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We study the inefficiencies stemming from a firm's operating flexibility under debt. We find that flexibility in replenishing or liquidating inventory, by providing risk-shifting incentives, could lead to borrowing costs that erase more than one-third of the firm's value. In this context, we examine the effectiveness of practical and widely used covenants in restoring firm value by limiting such risk-shifting behavior. We find that simple financial covenants can fully restore value for a firm that possesses a midseason inventory liquidation option. In the presence of added flexibility in replenishing or partially liquidating inventory, financial covenants fail, but simple borrowing base covenants successfully restore firm value. Explicitly characterizing optimal covenant tightness for all these cases, we find that better market conditions, such as lower inventory depreciation rate, higher gross margins, or increased product demand, are typically associated with tighter covenants. Our results suggest that inventory-heavy firms can reap the full benefits of additional operating flexibility, irrespective of their leverage, by entering simple debt contracts of the type commonly employed in practice. For such contracts to be effective, however, firms with enhanced flexibility and/or operating in better markets must also be willing to abide by more and/or tighter covenants. AbstractWe study the inefficiencies stemming from a firm's operating flexibility under debt. We find that flexibility in replenishing or liquidating inventory, by providing risk shifting incentives, could lead to borrowing costs that erase more than a third of the firm's value. In this context, we examine the effectiveness of practical and widely used covenants in restoring firm value by limiting such risk shifting behavior. We find that simple financial covenants can fully restore value for a firm that possesses a mid-season inventory liquidation option. In the presence of added flexibility in replenishing or partially liquidating inventory, financial covenants fail, but simple borrowing base covenants successfully restore firm value. Explicitly characterizing optimal covenant tightness for all these cases, we find that better market conditions, such as lower inventory depreciation rate, higher gross margins or increased product demand, are typically associated with tighter covenants. Our results suggest that inventory-heavy firms can reap the full benefits of additional operating flexibility, irrespective of their leverage, by entering simple debt contracts of the type commonly employed in practice. For such contracts to be effective, however, firms with enhanced flexibility and/or operating in better markets must also be willing to abide by more and/or tighter covenants.

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Section: Discussion Of Modeling Assumptionsmentioning

confidence: 99%

Is Operating Flexibility Harmful Under Debt?

2017

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“…Professional liquidator firms (like our research partner Gordon Brothers) understand the importance of tracking store performance during liquidation and making adjustments in price, inventory, and duration of liquidation accordingly. Research described in Craig and Raman () showed that data‐based forecasting and optimization could have improved the net recovery on cost (i.e., the profit obtained during a liquidation, stated as a percentage of the cost value of liquidated inventory) by two to five percentage points in the cases we examined. Interestingly, the experts’ decisions differed in some systematic ways from the method that we proposed in our study.…”

Section: How Data (And Big Data) Can Help Retailers Innovate While Exmentioning

confidence: 92%

Using Data and Big Data in Retailing

Fisher

Raman

2018

Production and Operations Management

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I n this essay, we examine how retailers can use data to make better decisions and hence, improve their performance.We have been studying retail operations for over two decades and have witnessed many, and been personally involved in a few, projects that delivered considerable value to retailers by better exploiting data. We highlight a few of these examples and also identify some other potential applications.

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“…Similarly, we also endogenize the impact of bankruptcy by including customers as an integral part of the supply chain. Finally, Craig and Raman (2015) characterize the detailed operational decisions, such as transshipment, store closures, and dynamic pricing, during a retailer's liquidation sale. Using real-world data, they show that the efficiency of liquidation sales can be significantly improved when various operational levers are optimized jointly.…”

Section: Related Literaturementioning

confidence: 99%

“…The amount of inventories liquidated during these sales is tremendous. According to Craig and Raman (2015), the value of inventory sold during the liquidations of Linens 'n Things, Circuit City, and Borders alone was more than $3 billion. To add to the pressure faced by retailers, liquidation sales, as regulated by state laws, are limited to short times periods such as 60 or 90 days (Ohio Administrative Code Chapter 109:4-3-17, Massachusetts General Laws Part 1, Chapter 93).…”

Section: Introductionmentioning

confidence: 99%

When Customers Anticipate Liquidation Sales: Managing Operations Under Financial Distress

Birge

Parker

et al. 2017

M&SOM

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The presence of strategic customers may force an already financially distressed firm into a death spiral: Sensing the firm's financial difficulty, customers may wait strategically for deep discounts in liquidation sales. In turn, such waiting lowers the firm's profitability and increases the firm's bankruptcy risk. Using a two-period model to capture these dynamics, this paper identifies customers' strategic waiting behavior as a source of a firm's cost of financial distress. We also find that customers' anticipation of bankruptcy can be self-fulfilling: When customers anticipate a high bankruptcy probability, they prefer to delay their purchases, making the firm more likely to go bankrupt than when customers anticipate a low probability of bankruptcy. Such behavior has important operational and financial implications. First, the firm acts more conservatively when either facing more severe financial distress or a large share of strategic customers. As its financial situation deteriorates, the firm lowers inventory alone when financial distress is mild or only a small share of customers are strategic and lowers both inventory and price in the presence of severe financial distress and a large fraction of strategic customers. Under optimal price and inventory decisions, strategic waiting accounts for a large part of the firm's total cost of financial distress, although a larger proportion of strategic customers may result in a lower probability of bankruptcy. In addition to inventory reduction and (immediate) price discount, we find that a deferred discount, in the form of rebates and/or store credits for future purchases, can act as an effective mechanism to mitigate strategic waiting. As a contingent price reduction, deferred discounts align the interests of customers and the firm and are most effective when the fraction of strategic customers is high and the firm's financial distress is at a medium level.

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Improving Store Liquidation

Cited by 10 publications

References 0 publications

Is Operating Flexibility Harmful Under Debt?

Is Operating Flexibility Harmful Under Debt?

Using Data and Big Data in Retailing

When Customers Anticipate Liquidation Sales: Managing Operations Under Financial Distress

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