Big box retailers like Target, Walmart, and Kohl’s have been dominating news headlines due to their growing excess inventory issues and declining profits. So, how did we get here? Could this have been prevented? Inventory management will be a critical discipline this year and beyond. Here, we explore some of the leading causes behind excess inventory in the retail industry and what brands and retailers can do to get ahead of it.
1. Excess inventory is a business reality and can build up at any time, even with strong planning solutions in place.
There are uncontrollable, external factors that can lead to increased levels of excess inventory, such as economic instability, supply chain disruptions, unexpected weather, and changes in consumer spending habits. In recent years, we’ve seen examples of unexpected events that have resulted in challenges with both shortages and excess inventory.
At the onset of the COVID-19 pandemic for example, the industry experienced rapidly shifting demand and spending behavior as consumers prioritized essential items such as medical supplies, groceries, and non-perishables in bulk. As a response to panic-buying, companies ramped up production to address inventory shortages and keep up with the increased demand for certain categories. While this addressed the problem in the short-term, many companies were suddenly faced with increased levels of slow-moving and excess inventory down the line when demand inevitably dropped. This type of phenomenon of when inventory levels undergo increasingly larger fluctuations up the supply chain in response to a shift in consumer demand is also known as the “bullwhip effect.”
Similarly, consumers shifted from experiential spending to prioritizing physical products like home goods, electronics, and clothing when travel restrictions were in place, and in turn brands increased production in those categories to keep up with demand. As COVID restrictions continue to ease throughout the world, consumers are once again prioritizing spending on travel and experiences rather than physical goods, leaving companies with higher than expected inventory levels.
Brands and retailers were also forced to quickly adapt to inventory challenges due to ongoing supply chain disruptions and shipping delays resulting from international lockdowns, fuel shortages, inflation and market volatility, and uncertainty regarding current events such as the Ukraine and Russia conflict. Even with planning solutions in place, companies will continue to struggle with unexpected events and disruptions unless they also have a solution enabling them to proactively identify, manage, and sell excess inventory earlier in the product lifecycle.
2. The retail industry still relies on outdated legacy systems and manual, time-consuming processes.
Despite significant advancements in inventory and supply chain technology, many companies still manage and sell excess inventory the same way they did 30 years ago—through a complicated series of steps involving spreadsheets, emails, phone calls, and in-person meetings.
What does this process look like?
Teams are often required to manually compile data from multiple systems into one file and manipulate the file to determine what is available to sell, and they spend a significant amount of time and resources fixing data that is incomplete or inaccurate. Multiple email exchanges where spreadsheets are being passed back and forth with various edits and formatting changes introduces an increased risk of human error and incorrect inventory data being shared. Due to how time-consuming this interaction is, stock levels might no longer be accurate by the time a transaction is completed, forcing companies to manually reconcile what is actually available to sell.
A process like this can significantly delay a company’s go-to-market cadence or even the process of identifying overstock earlier in the lifecycle. Inventory devalues exponentially over time the longer it continues to sit in warehouses, and companies that delay their go-to-market due to any of these factors often find themselves with increased operating costs and major challenges in recovering margins.
Companies that have minimized the impact of excess inventory have implemented solutions that enable greater inventory visibility and as much automation as possible to ensure predictable processes for a faster go-to-market cadence.
3. Excess inventory is not a high priority for leadership—but it should be.
Companies often address excess inventory as an afterthought or a one-time issue. The carrying costs of excess inventory are significant and companies are hurting the bottom line by taking a reactive approach to managing and selling. From cash flow issues that prevent companies from effectively repaying loans to increased storage and management costs, there are financial consequences that make it critical for the C-Suite to prioritize excess inventory as a meaningful way to unlock working capital.
Beyond the financial benefits of optimizing excess inventory, there are also potential benefits that would enable companies to meet their sustainability and ESG goals. Companies across industries are under increasing pressure from investors and consumers alike to introduce more sustainable practices into their business. By effectively managing excess inventory, companies can amplify their efforts in reducing the amount of harmful waste that ends up in the environment.
Leadership should continue to prioritize digital transformation by providing their teams with solutions that provide greater inventory visibility, tools for automating tedious processes, and historical data and insights to inform strategic decisions. With the right solutions in place, companies can gain a true competitive advantage and proactively address any potential inventory challenges earlier in the product lifecycle to maximize sell-through and recovery.
Conclusion
While the problem of excess inventory is not new, there are steps that brands and retailers can take today in order to get ahead of challenges in the future. Supply chain disruptions over the past couple of years have exposed the flaws of how excess inventory is managed and sold—at the same time, significant technological improvements are enabling teams to quickly adapt and optimize this inventory more strategically. Companies that prioritize digital transformation in the supply chain will be the ones best positioned to weather the storm.
About INTURN
INTURN 360 helps organizations across industries sell excess inventory faster and maximize recovery. Companies like Unilever and KIND have seen a 10x faster go-to-market, 10%+ improvement in product margins, and 85% reduction in operating costs. Get in touch to learn how INTURN 360 can help!