Bad inventory is an expensive problem
Worldwide, retailers are losing $1.75 Trillion annually as a result of bad inventory.
Managing inventory becomes exponentially more complicated as a retailer grows; and often becomes an overwhelming challenge.
This issue is so pervasive in the industry it is often accepted as the status quo.
So, a retailer who wants to gain a competitive edge while avoiding undue losses needs to be able to spot the indicators of bad inventory and know how to fix them at the root.
What is bad inventory called?
Bad inventory refers to products that cannot be sold because they are either no longer functional, or there is no more demand for them.
What is bad inventory called day-to-day? You’ve heard it referred to as, overstocks, write-offs, dead-stock, excess, spoiled, expired, and unsold.
Identifying bad inventory can mean the difference between bringing in profits or losses at the end of the year.
So, what should you be looking out for?
Indicators you’re managing bad inventory
You may be dealing with a bad inventory if you are continuously having one or more of the following issues:
1. Drastic Markdowns
Last-minute markdowns that offload stock at a loss.
2. A low rate of inventory turnover
Low demand inventory builds up resulting in overstocks
3. No room for in-demand inventory
Stagnant inventory is occupying shelf space, in place of high-demand products.
4. Consistently left with fringe sizes
Certain sizes (usually extra-large or extra-small) consistently remain unsold by end-of-season.
5. Constantly adjust for exceptions in demand forecast
There is constant manual intervention, this may be transferring inventory between stores or ordering new stock.
6. A high cost of storage
A large portion of your inventory budget is spent on stocking inventory,
7. A high cost of overstock management
A large portion of your budget goes toward planning, storing, transporting and managing unsold inventory.
It’s important not to write-off these issues as ‘the cost of doing business’, because their true impact is greater than you think.
Before you can fix a problem, you need to understand its depth and impact:
- Why is it bad to have too much inventory?
- When is inventory turnover good or bad?
- Why is bad inventory management so common?
Why is it bad to have too much inventory?
There is a calculable cost to bad inventory.
Inventory storage, overstock management, ROI lost to markdowns, and even lost sales due to stockouts, are all tangible costs of bad inventory.
However, there are also less obvious, but just as detrimental costs to be considered. For instance:
- Selling off inventory at a lower price can devalue your brand
- Stocking items that are not in demand pushes consumers to other retailers
- Stocking low-demand inventory leads to an overall loss in market share
- Bad inventory results in overstocks which contribute to environmental pollution.
That last point should not be overlooked. Overstocks are a $50 Billion dollar problem that is having a devastating socio-economic, and environmental impact on the world.
When is inventory turnover good or bad?
The inventory turnover rate is one of many retail KPIs which determines how quickly older inventory is sold, and newer inventory is brought in.
Typically, a higher turnover rate is better, as this means you are bringing in inventory that is in-demand and selling it quickly.
To calculate the turnover rate, retailers look at the cost of goods sold over a set period, divided by the average inventory for the same period.
Inventory turnover formula: seasonal demand
The turnover rate is a great indicator of whether there are any issues with your inventory management.
Why is bad inventory management so common?
There are three main challenges in identifying and managing bad inventory:
1. Ineffective forecasting
In order to predict sales demand without a crystal ball, most retailers extrapolate past sales data into the future.
The trouble with this approach is that there are too many year-to-year fluctuations which lead to inconsistent inventory levels across the business.
Changes in inventory mix, seasonal demand, population shifts, and competitor activity are just some of the factors that influence demand.
Accounting for all relevant factors requires advanced mathematics and powerful computing.
2. Siloed inventory management
Omnichannel retailers manage tens of thousands of SKUs across multiple channels. With so much to manage it often seems easier to divide and concur.
The trade off, however, is that when channels are siloed there is limited visibility across the business.
Without a clear picture of the entire business it is easy to have miscommunications, missed opportunities, wasted time and costly errors.
For an omnichannel retailer to be successful they must be able to track and smoothly manage inventory across all channels.
3. Outdated methods (spreadsheets)
Perhaps the biggest challenge that emerged after the digital transformation of the retail industry is that many are left using outdated methods to manage inventory.
Scaling traditional methods of inventory management becomes especially problematic as a business grows and adds additional channels.
This is because, traditionally, In-house analytics is often done manually using spreadsheets.
Although this method yields results, it is labor intensive. Manually manipulating millions of data points is time-consuming, costly, and prone to human error.
Further reading: Causes of Retail Overstock and Best Ways to Avoid Them
How to Fix it
The good news is that once the problems have been identified, there are steps you can take to fix them.
Here are the 3 most impactful changes you can make to get tangible results in your GMROI:
1. Move from sales forecasting to demand forecasting approach
As we know, the traditional sales forecast approach looks at historic trends in sales of a group of products (or a store) to determine the inventory strategy for the coming year.
This approach falls short because retail sales are dynamic with different variables changing from year to year. It requires constant human intervention, manual customization and relies too much on generalization.
A demand forecast approach, on the other hand, determines how much consumers actually want to buy based on a combination of relevant factors that include past sales, seasonality, geodemographics, product mix & price, and more.
The latter process is much more dynamic, capable of generating an updated forecast at any given time.
The precision of demand forecasting enables retailers to manage inventory at store/SKU level, significantly decreasing bad inventory.
2. A unified approach to inventory optimization and management – for unified commerce
Omni-channel retailers need to have a unified approach to their businesses in order to stay competitive and be successful in this industry.
Using a unified inventory management solution allows for faster identification of inventory problems and results in fewer bad inventory issues like overstock.
The visibility that a unified solution provides enables retailers greater insights into inventory across all sales channels (from physical location to Ecommerce). This means retailers can pinpoint high and low-performing products for each specific location.
This unified approach is more dynamic and improves communication among teams. It provides a better allocation of inventory and fulfillment across all sales channels, which in return will maximize the GMROI for your retail business.
3. Partner with an AI-powered software expert that has a unified demand forecasting platform
According to McKinsey, retailers who leveraged advanced analytics were outperforming their competition by 68% in 2019, and the gap has increased exponentially since then.
There may be little doubt that retailers need to be adopting analytics, but where to start?
Finding the right solution without wasting time and money on flashy vendors nowadays can be tough as AI & machine learning have become the buzzwords in the industry.
Thankfully, finding a suitable vendor is not hopeless! Sticking to the following 2 rules is a great place to start:
Rule # 1: Know the Return On Investment (ROI) before you buy
Make sure your vendor can outline and provide proof of the tangible gains you will experience before investing in their solutions.
Rule #2: Test the data to see the power of analytics on your business
Any effective solution should configure perfectly to your specific business limitations, constraints, and goals to provide optimal results.
Don’t lose market share to bad inventory management
Through both visible and hidden costs, bad inventory is slowly bleeding otherwise thriving retailers dry as their businesses expand.
If you’re facing recurring inventory issues, they may be indicating a larger problem that simple band-aid solutions cannot fix. The best way to scale your retail business and be competitive in today’s industry is to invest time and resources into optimizing operations at the root.
In recent years we’ve witnessed retail giants too big to adapt and shutter their doors. Take action before you lose any more market share
If you’re thinking of upgrading your inventory management software or investing in a new suite of solutions, but don’t know where to start, check out our free guide to purchasing inventory management systems.