The business of the future: home inventory management systems

One of the great accomplishments of the business world in recent decades has been to make the supply chain leaner, whether Toyota's just-in-time parts delivery system or Wal-Mart's minimization of inventory.

Retailers, in particular, have become vastly more efficient, greatly lowering the mark-up. If you pay $100 to a manufacturer on January 1, but the merchandise sits around in various warehouses until you sell it on July 1, and if your cost of capital is, say, 10%, the financing costs alone added 5% or $5. But, if you can sell it by February 1, you've saved over 4%.

And yet, much of what retailers like Costco are doing is handing the problem of inventory management off to customers. Costco is operating on a just-in-time inventory system, but you aren't. If you buy a giant jar containing a six month's supply of pickels, instead of a one month supply, you've handed Costco five months worth of your money.

And, of course, your Corolla isn't big enough to haul around a full shopping trip worth of giant products from Costco, so you trade it in for an SUV.

And then, you stick your giant jar of pickels in your refrigerator and after a few months, while it's still half full, you bring home some other giant jar and you have to throw something old out of the refrigerator to squeeze the latest Deal of the Century in. So, you look around, decide you're sick of pickels, and who knows if they are still good? They are pickels, so they should last a long time, but it's hard to remember when you got them it was so long ago. And they don't look very appetizing. So, out they go, half-consumed.

Eventually, it occurs to you that you're wasting money throwing out old food to squeeze in new food, so the only solution is to get one of those enormous Viking refrigerators. But to do that you'll have to enlarge your kitchen and, while you are at it, put in granite countertops. Fortunately, everybody knows that home prices will go up forever, so you just take out a new mortgage on your house, with one of these adjustable rate mortgages with a super low rate for the first two years.

What could possibly go wrong?

And that's not all, because most consumers have only the most rudimentary inventory management skills.

Products come in such large quantities now that you can't get in an old-fashioned rhythm like "Buy a one pound can of X every week." That's easy to remember, whereas remembering to "Buy a three kilo vat of X every month and a half" is hopeless.

They have so much stuff around the house that they can't find the thing they are look for, so they go buy another one, which only makes finding stuff even worse.

And there's no easy way to keep track of what you need, so you tend to overbuy some products and forget to buy others.

The good news is that the basic technology businesses to track inventory, such as UPC scanners, Radio Frequency Identification tags to find goods you've already bought, wi-fi networks, the Internet, PCs and printers to generate shopping lists are mature.

On the downside, it's a giant systems integration problem, and there are lot of chicken and egg problems involved.

For example, better supply chain management could include home delivery of groceries triggered automatically by analysis of consumption rates and supply on hand. Home delivery based on customers laboriously picking from menus has been tried ever since the mid-1990s, but if you have the time to hang around the house waiting for the deliveryman to show up so you can put your food away in the refrigerator before it spoils, you probably have time to go shopping yourself. What you would need is indoor-outdoor access to a refrigerator, like old-fashioned coal bins had an outside door for the deliveryman and an inside door for the resident so deliveries could be made even when nobody was home. But nobody is going to rebuild their house for that purpose until all the other parts are in place, but will all the other parts be profitable to put into place until all the parts are in place?

So, I assume most businesses who invest in these systems will lose money for the next decade or two, but a generation from now, I expect that millions of American homes will be equipped with sophisticated inventory management systems.

My published articles are archived at iSteve.com -- Steve Sailer