14 Feb Putting an End to the $50B Overstock Problem with Advanced Analytics
Putting an End to the $50B Overstock
Problem with Advanced Analytics
Retailers are empowered by AI and ML technology driven analytics to optimize inventory and eliminate the $50B overstock crisis.
Some retailers are facing backlash over images showing piles of unsold inventory that have been burnt or destroyed.
This overstock issue is not new, and retailers have tried to manage their unsold goods through donations and resellers, but there is simply too much inventory. In 2018 retail giant H&M disclosed that they had $4.3 Billion in overstocks. An amount that is hard to picture and even harder to deal with.
Far from simply a financial issue, overstocks are devastating the environment. Raw materials are destroyed, and a huge amount of energy is consumed when producing and moving products across the world. Not to mention the hours of people’s labor, blood, and sweat that is poured into each product, only to have them destroyed with no purpose.
It’s a frustrating problem, given that it’s so easy to solve. Those who embrace modern technology are already optimizing their inventory with advanced analytics. Entirely preventing these massive amounts of overstock.
So, if a retailer is wondering why consumers and investors are pulling away, it’s because they are still using a traditional approach in a modern world.
How do retailers get into this mess?
Whether it’s fast fashion or high-end brands, at the end of the day, the goal of a business is to maximize shareholder value.
As such, retailers can’t afford to risk losing sales because they ran out of stock.
The consequences of out-of-stocks are severe, from losing profits to losing customers, and inevitably market share. The direct and indirect damages of lost sales are so great that retailers prefer to markdown unsold inventory, or even get rid of it at cost.
Retailers face the challenge of figuring out what the product mix should be, and how much of each product to purchase. On top of that timing is key, bringing product in too late risks missing potential sales, but too early means incurring carrying costs and tying up cash flow. These variables, along with pricing and vendor lead times make planning demand very difficult.
Understandably, retailers will purchase additional stock to offset the dynamic nature of the retail industry. Unfortunately, many are over-correcting and bringing in substantially more inventory than they can sell.
Related article: How to Solve Out-of-Stocks (While Reducing Inventory)
But why burn the inventory?
With growing scrutiny from consumers and added pressure from lawmakers, why would a respected retailer like Burberry still choose to destroy £28.6M in unsold clothes and accessories?
The answer is complicated, but let’s touch on some of the reasons:
1. Poor Demand Forecasting
The primary reason retailers find themselves in this no-win situation is a lack of effective planning from the start, because of poor demand forecasting. It’s reasonable to add buffer stock to prevent lost sales, but some retailers are bringing in unreasonably more inventory than they could ever possibly need.
2. Brand Image
Luxury brands like those owned by Richemont (Cartier, Piaget, and IWC) create value through exclusivity. This means they can’t markdown their products without devaluing the brand. As a result, Richemont has admitted to destroying $563 million worth of watches in 2018/2019.
A current U.S. Customs and Border Protection program (19 USC § 1313, U.S. Code), states that retailers can recover 99% of all fees paid on imported goods that have been destroyed.
Unsold inventory is often sold at markdown prices by 3rd party resellers. This can be an excellent solution, but when too much product is accessible to the public, they stop shopping at retail prices. Retailers have to be careful not to suffocate their own demand.
Why is inventory being destroyed instead of recycled? Not all plastics and textiles can be recycled. The majority of goods are made up of mixed materials both recyclable and not. National Geographic reported that only 9% of plastics were recycled in 2019, and less than 15% of textiles according to the EPA.
6. Simply Too Much Overstock
There are plenty of organizations that accept and distribute donations locally and internationally. Unfortunately, while donating may seem like a perfect solution, large scale donations can bring more harm than good. The massive amounts of exported inventory have suppressed local markets, so much so, that in 2016 the East African Community (EAC) voted to completely ban imported clothing.
The truth is retailers find themselves stuck between a rock and a hard place. Retailers need to know that making their shareholders happy without becoming the capitalist villain is possible.
Related Article: Causes of Retail Overstock and Best Ways to Avoid Them
Why should retailers be paying attention?
Albert Einstein said, “We can not solve our problems with the same level of thinking that created them”.
The world has changed and time is running out for retailers to adjust the way they do business. Shifts in consumer behavior and digital innovations are causing previously beneficial business practices to be harmful for communities and retailers alike.
A 2020 study by Research Insights reported that 80% of shoppers, across 29 countries, believe sustainability is important to them, with the majority willing to pay more for environmentally responsible brands.
Meanwhile, the digital transformation has introduced industry innovations like advanced analytics, which optimized the way business is done. Retailers who adopt these new practices save time and money, resulting in stealing market share from traditional retailers.
We know this doesn’t have to be the case. Leading retailers are already using technology to pinpoint and solve the root cause of their inventory problems. By leveraging Advanced Analytics these retailers have been able to optimize inventory so that they can avoid lost sales without paying the price of overstocks.
So what is advanced analytics, and how can it help?
Advanced Analytics and AI accurately forecasts demand and recommends intelligent insights for decision makers to rely on.
Retailers are easily able to account for all the factors outlined above when forecasting demand. This empowers businesses to bring the right amount of inventory, in the right product mix, and at the ideal time.
Perhaps traditional retailers are put off by the complex sounding terminology surrounding AI, machine learning, and analytics. The reality is that these systems are easy to use and are becoming more intuitive every day. In fact they provide a consistent, accurate, and scalable workflow that is less prone to human error.
So not only are early adopters of this technology saving millions of dollars, but they are positively impacting the environment and communities around the world.
Retailers, it’s time to adapt.
What is truly surprising is that this technology has been around for over a decade. It has been tested, it has been proven successful and even noted as the future of retail by institutions like Gartner.
Yet many retailers are choosing to stick to destructive, profit bleeding, outdated processes. Either way, it’s only a matter of time before the old guard is washed away by the tsunami that is the digital transformation.