Why Mountains of Excess Inventory and Overselling Should Kill Many Promising Companies

Do you remember the early days of the pandemic? The unprecedented increase in online shopping meant retailers were overwhelmed with demand. Locked-in consumers, desperate for a distraction, rushed for everything from home fitness equipment and game consoles to gazebos and scatter cushions – and warehouses were cleared of inventory as supply chains tightened. distorted under the extraordinary pressure.

Stock-outs have been disastrous for retailers during the pandemic – up from 250 percent — and with 37% of consumers saying they would simply shop elsewhere if they couldn’t find what they wanted, the general mood was one of impatience. Rather than profit from the rise, retailers suffered. According to data from our sister company, Brightpearl, almost half of retailers (46%) said they had experienced stock-outs, resulting in lost sales.

It’s fair to say that most businesses that survived these waves of e-commerce came out of it shaken at best. The lucky ones managed to balance stock levels reactively, restocking a steady stream of their best-selling products as orders came in, and even growing their business successfully. Most, however, had taken a hit to their profits and, in what is known as a “whiplash effect” in supplier circles, ended up buying a mass of shares as a safety cushion.

From out of stock to overstock

When you consider the unpredictability of the past two years, overstocking seems a forgivable choice. The global lockdowns have made the period of people stuck indoors, supported only by a stream of online deliveries, look like it will never end.

Of course, this level of demand could not be sustained, and in 2022 they dropped significantly. What no one could have predicted was the number of simultaneous crises that would emerge, sending retailers around the world into a state of cash flow paralysis.

Among them is a global supply chain crisis – plagued by driver shortages and long shipping times, underpinned by a lack of resources and skyrocketing costs caused by the war in Ukraine. High rates of inflation and the rising cost of living mean consumers are hunkering down on discretionary purchases and saving their money for food and gas. Even yields are up, reaching 16.6% in 2021 from 10.6% in 2020 (National Retail Federation).

The result? Retailers who overstocked during the pandemic are now stuck piling up a mountain of merchandise in their warehouses that they can’t move. With inventory ROI slowing down, this can hurt cash flow predictability.

Unsold inventory is another source of lost revenue that is an absolute killer for cash flow; the other side of the piece out of stock. Not only does this cost retailers money, but the cost of inventory clearance deals a devastating blow to the bottom line that can be deadly for businesses.

Retail Week recently warned that the post-pandemic problem of excess inventory could be the final nail in the coffin for retailers, while other reports describe traders overstocked by more than 30% without space to keep everything.

For example, Target recently announced plans to “adjust inventory” with additional markdowns across the board.

But these reactive, stop-gap solutions aren’t viable for everyone and actually make things worse. Six in 10 retailers have raised prices to cover expenses and recoup losses, while 29% are opting to “take the hit” instead to keep prices stable. Either way, nobody wins, because either the retailer or the customer gets hit in the pocket.

Additionally, there is no indicator of when the outlook will change, not with so many global factors at play. As far as supply chain issues are concerned at least, experts have predicted effects could last until 2023. This means companies will have months of uncertainty to contend with, alongside an overstock warehouse trapping their money; stuck in a tug of war between what they can sell and trying to get rid of what they can’t.

Clearly, this inability to manage inventory intelligently is a corrosive force for retailers, both in terms of revenue and their long-term viability. The crisis is severe. In fact, 26% of online retailers are only six weeks away from bankruptcy if their cash flow problems don’t improve.

Clear Inventory Fog

These unforeseen circumstances have increased the pressure on retailers, but there are lessons we can learn operationally. The heart of the problem here is the lack of visibility – into inventory planning and purchasing, inventory control and supply chain.

Without the ability to target those cash flow blockers lurking in the warehouse — excess inventory, out-of-stock items, and products that drive sales or become obsolete — retail businesses struggle to intelligently solve their inventory issues. There must be a way to laser focus on trapped revenue streams, intelligently prepare for unpredictable peaks and troughs in demand, and account for supply chain issues such as lead times. prolonged in purchasing decisions.

So what is the solution ? One thing is certain, it’s not in the spreadsheets. Calculating something as nuanced as forecasting predictions among so many environmental factors would be next to impossible, not to mention the weather.

The key lies in using solutions that drive business intelligence forward, such as inventory planning and demand forecasting software. With it, businesses can gain visibility into their inventory, accurately forecast sales, and consider variables such as supplier costs and delivery times down to meticulous levels of detail.

We know that having access to this data leads to better decision-making and more optimized cash flow, which is critical to surviving as we enter a tough recessionary climate.

Manual analysis and guesswork will no longer serve businesses in the fast-paced world of e-commerce. This will invariably lead to mountains of excess inventory and many doomed businesses.

New solutions such as data-driven demand forecasting are needed to enable retailers to keep a constant stock of their best-selling items, release their duds, eliminate the risk of overselling, and make informed decisions. in purchasing, marketing, pricing and even personnel. Then they can come down from the overstock/out of stock seesaw and back up the ladder to profitability and growth.

Conclusion

Bringing consumers back online will be a daunting task, but the multifaceted disruption of e-commerce makes it essential that retailers do all they can to regain control of the service they provide. Their long-term survival may – and probably will – depend on it.

Jill Liliedahl is vice president, revenue, for Inventory Planner by Sage. After six years as an entrepreneur, Liliedahl now works with e-commerce businesses, helping them be more efficient and make informed buying decisions that improve their bottom line.

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