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Causes of Retail Overstock and the Best Ways to Avoid Them

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Piles of retail overstock boxes stacked on warehouse shelving.

To remain profitable, retailers must avoid losing sales and stay on top of situations, like out-of-stock items. However, there is another costly culprit that has the potential to cost retailers a lot of money – and that is overstock.

Not only do overstock situations force retailers to markdown inventory at the end of a season at slim-to-no profit margins, but it also takes up physical space in stores warehouses, accruing carrying costs, and ties up extra cash that could be used towards advancing business goals.

It’s a common problem that’s been going on for as long as retail has been a thing. And, according to reports, it is not relegated to new players in the retail space.

Some shocking examples of overstock include Swedish apparel giant H&M, which reportedly amassed $4 billion worth of unsold clothing as of June 2018. While they applied a range of typical strategies to address the issue, such as in-store and online sales, and selling to outside markets, executives were reluctant to pursue that route aggressively as they felt it would damage the brand. In the end, much of the unsold overstock inventory was donated to charity or recycled. On the heels of this news, stock in the company plunged by 28 percent in 2018.

The second annual Inventory Distortion Study, published through a partnership between Tyco Retail Solutions and global research firm IHL Group, states that retailers lose about $124 per every individual in the world due to inventory distortion, totalling more than $818 billion every single year. Breaking it down, that number represents the following divisions:

  • 56 percent due to out-of-stocks ($456.3 billion)
  • 44 percent due to overstocks ($362.1 billion)

Common reasons why retailers have overstock

Retailers have various reasons for overstock. These include:

1. Avoid out-of-stock

When an item is out of stock, retailers risk their reputation and potentially lose the sale to a competitor. Having excess inventory on popular items gives them a safety net.

2. Sizes left over

In fashion retail, most vendors send out packages with evenly distributed sizes. Even when the vendor allows some flexibility, it is exceedingly difficult to determine the correct size distribution when ordering which leads to overstock on unpopular sizes. Each product at each store or even each style will have a different demand for sizes.

3. Logistics and fulfillment challenges

Having the right product at the right store at the right time is critical, but if you have any issues with logistics or experience inconsistent vendor lead times, the order may end up at the wrong store. When the customer can’t get what they want when they want it, the tendency is to purchase online or go elsewhere. In the end, you are stuck with inventory you’ve purchased but can’t sell.

4. Safety buffer in the warehouse

To avoid out-of-stock situations, many retailers will stock a buffer above and beyond what they think they will need. Accurate forecasting is difficult because there are so many factors that can influence demand over time. How much safety stock is ideal? Too much will mean overstocks, carrying costs, and potential markdowns.

5. Failed retail promotions

Retailers typically run thousands of promotions every year. The problem is that they generally launch them without any advanced analytics that ties back to inventory levels in the stores, such as projected demand, how the promotion will affect the sale of other products and many other critical issues. (Promotional Cannibalization)

6. Buying and assortment planning

Buyers are generally optimistic about the products they bring in but building the optimal mix of products is a challenge. The 80/20 rule, also known as the Pareto Principle, says that 80 percent of your profit comes from 20 percent of your goods, while 80 percent of your goods will only bring 20 percent of your profit. Understanding your customers and what sells well in each category is critical, but without the benefits of advanced analytics may cause you to lose your competitive edge.

How Predictive Analytics and Artificial Intelligence help retailers avoid overstock

Having access to a unified platform that delivers predictive analytics powered by an AI engine can help retailers to solve their overstock problems. Based on the actual business that you do, the system would calculate demand forecasts with great accuracy, which could then be leveraged by solutions designed to optimize retail operations.

Retalon provides retailers with a fully unified predictive analytics & AI platform. Some of the benefits of Retalon deployment include:

  1. Merchandise and assortment planning: A full suite of solutions for financial, merchandise, assortment, store planning, and Open-to-Buy.
  1. Smart allocation, purchasing, and replenishment solutions: purchasing, allocation, and replenishment solutions recommend the most appropriate purchase orders and help you distribute inventory across your business intelligently, while the replenishment solution automates restocking, tracking demand, sales, and a multitude of other factors that help you deliver consistent results.
  1. Promotions and pricing management: suggests the most profitable promotions based on a range of variables, including product cannibalization and inventory management.
  1. Safety stock solution: calculates for you the optimal amount of stock needed for all distribution channels, warehouses, et cetera, protecting you from demand changes, vendor lead time variability, and more besides.
  1. Inventory transfer solution: the predictive analysis engine in the Retalon platform analyzes every possible influencing factor, proactively recommending store-to-store transfers to reduce overstock and meet demand in other locations.

While consumers can be quite forgiving if the item they want is out of stock, if they choose to purchase online and pick it up in-store and the item is not there, one-third would never shop at that store again.

Regardless of the causes of your overstock challenges, predictive analytics will help you maintain an excellent customer service level, while reducing lost sales, carrying costs, and markdowns.

Retalon’s predictive analytics and AI technology are designed specifically for retailers to help avoid overstock while protecting them from out-of-stocks. Choosing Retalon gives you an intelligent predictive retail platform, helping you build a strong, foundation that supports your future planning needs as well as inventory management, pricing, and promotions.

Know the ROI before you buy! Get in touch with us to get a personalized demo to learn about how Retalon’s predictive analytics will help your specific retail business.

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