Inventory issues in the retail sector
May 31, 2024
Getting inventory levels wrong can easily happen within the retail industry, but it can be very damaging. Too little inventory and stockouts mean lost revenue and dissatisfied customers. Too much and precious capital is tied up unnecessarily and expensively before the inevitable discounting wreaks havoc with gross margins and adversely affects the bottom line.
Taken to extremes, excessive inventory can threaten the survival of a business or at least make restoring it to former glories very difficult, as Julian Dunkerton learnt when he returned to Superdry five years ago to turn it around, only to discover there were 19 million surplus stock items to clear.
The realities of poor inventory control
Research into retail inventory issues in the summer of 2023 by product performance consultants, ROI Hunter, revealed some uncomfortable truths about UK retailers and their inventory management:
- 62% of retailers were struggling to clear overstocks.
- 48% are having to discount to reduce overstocks.
- 56% find predicting future deadstocks unduly difficult because of poor product inventory visibility and inadequate control over purchasing.
- 62% of retail marketers say they lack influence over purchasing.
- 47% of marketing budgets are spent on pushing items with low availability or stockouts.
It would be unrealistic to expect that these problems will have magically disappeared since last year. The scale of the issue can be seen from one estimate in 2023 that inventory issues were costing US retailers $123bn annually, as well as the brand damage it causes.
The causes of inventory issues
Poor inventory management may be the most obvious and most critical factor in mismatches between inventory and customer needs, but it is not the only factor. The past few years have exposed the vulnerability of many supply chains, while customer behaviour and demands have never been more difficult to predict than in today’s multi-channel retailing environment.
Improving inventory management
There are more strategies for addressing retail inventory issues than bargain hunters at a Black Friday sale, many of them specific to individual retailers or retail sub-sectors. But some basic techniques are universal.
Using ABC analysis
ABC analysis represents the most basic first step in intelligent inventory management, which is making sure you have enough of the inventory that’s most valuable to your business. Inventory should be separated into three (or more) broad categories, ranked in order of sales volume or profitability and prioritizing your inventory accordingly.
Category A would be the products that generate the most profit or the highest gross margins. Category C are low margin items, slow moving products and deadstocks. Category B are inventory items in between these two extremes. Smart retailers use this type of analysis to help with future ordering, as well as decisions on marketing, displays and merchandising.
Choosing and setting Key Performance Indicators (KPIs)
What isn’t measured isn’t managed, so KPIs are vital – but not too many of them. A major software house once identified 17 different retail inventory KPIs. The trick is selecting the handful most crucial to the particular business – such as gross margin, inventory turn, sell-through rate or inventory shrinkage – and then make sure those responsible for inventory management work towards the chosen metrics.
Forecasting demand
Predicting demand for a stock item over a defined upcoming period is tough but has to be done. The basis might be historical sales and other data combined with knowledge of upcoming seasonality, market trends or special events, such as holidays and promotions. There is little excuse for not using data analytics software, increasingly driven these days by artificial intelligence. What isn’t acceptable is relying on hunches or gossip around the retail trade.
Optimising inventory turnover rate
Slow inventory turn can indicate decreased market demand, which could indicate reorder quantities and safety stock need lowering, prices need changing and incentives are necessary to reduce stock levels. On the flipside, a high rate could mean insufficient volumes purchased, or that now is the time to raise prices to stabilize the ratio and boost unit profit margins.
Most items move through a cycle of increasing demand, followed by plateauing before an eventual decline. It pays to focus on items going into their decline stage and reducing stock levels before they become deadstocks.
Fixing reorder points
At its simplest, the reorder point is the forecast daily usage in units multiplied by the days of lead time necessary for replacement, plus the units of safety stock. This could be done manually, but in reality this is another function best carried out by demand planning software driven by AI. Without an effective reordering system, stockouts are inevitable.
Deciding safety stock levels
This is an inventory buffer intended to protect retailers against unexpectedly high demand, failure to place timely reorders, supplier delays or inaccurate demand forecasting. It can be calculated by taking the number of units sold per day and multiplying it by the number of days’ worth of safety stock required. The appropriate level varies from business to business.
Verifying physical inventory levels
Rather than relying on management information systems, every retailer should physically count its inventory periodically to ensure its records are accurate. These exercises can address issues such as losses from theft, as well as damage, defects, and returns. Count frequency will depend on the complexity and scale of the inventory and will reflect factors such as item value and profitability.
Calling in outside assistance
Not every retailer has the in-house expertise or the management bandwidth to come up with the right solution to such a complex aspect, so there should be no hesitation about using independent retail experts to drive through an inventory management improvement project. Done properly, the costs will very soon turn into a net benefit.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.