Why Piles of Extra Stock and Overselling Will Kill Many Promising Corporations

Do you remember the beginnings of the pandemic? The unprecedented surge in online shopping has resulted in retailers being overwhelmed by demand. Locked-up consumers, desperate for a distraction, scoured everything from home gym equipment and gaming consoles to gazebos and scatter pillows – and stocks were cleared of inventory as supply chains collapsed under the extraordinary pressure.

Stock outs have been disastrous for retailers during the pandemic – a 250 per cent rise – and with 37 per cent of consumers saying they would simply shop elsewhere if they couldn’t find what they wanted, the general mood was impatient. Instead of benefiting from the surge, retailers suffered. According to data from our sister company Brightpearl, almost half of retailers (46 percent) said they were experiencing inventory levels, which resulted in lost sales.

It’s fair to say that most companies that have weathered these e-commerce waves have emerged clueless at best. The lucky ones managed to reactively balance stocks, replenish a steady stream of their best-selling products as orders came in, and even successfully grow their businesses. However, most had experienced a severe drop in profits, referred to in supplier circles as the “bullwhip effect,” which led them to buy a lot of shares as a safety net.

From shortages to overstocks

Given the unpredictability of the past few years, overstocking seems like a forgivable choice. Global shutdowns made the period when people were stuck indoors, sustained only by a torrent of online deliveries, seem like it would never end.

Of course, this level of demand could not be maintained, and in 2022 they have fallen significantly. What no one could have foreseen was the number of concurrent crises that would leave retailers around the world in a state of cash flow paralysis.

Including a global supply chain crisis – widespread with driver shortages and long delivery times compounded by a lack of resources and skyrocketing costs caused by the Ukraine war. High rates of inflation and rising cost of living mean consumers are shedding discretionary shopping and saving their money on groceries and gas. Even yields have increased, hitting 16.6 percent in 2021 versus 10.6 percent in 2020 (National Retail Federation).

The result? Retailers who had too much stock during the pandemic are now hoarding a mountain of goods in their warehouses that they can’t move. When the return on inventory investment slows, it can affect cash flow predictability.

Unsold inventory is another revenue stream that is an absolute cash flow killer; the other side of the out-of-stock coin. Not only does this cost retailers money, but the cost of clearing inventory is a devastating blow to the bottom line that can be fatal to the business.

Retail Week recently warned that the post-pandemic problem of overstocking could be the final nail in the coffin for retailers, while other reports describe retailers being more than 30 percent overstocked with nowhere to store it all.

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

But these reactive stopgap solutions aren’t workable for everyone, and they’re making things even worse. Six out of 10 retailers have increased prices to cover spending and offset losses, while 29 percent choose to “hit” instead to keep their prices stable. In both cases, nobody wins, since either the dealer or the customer picks the pocket.

Furthermore, there is no indication of when the outlook will change as there are not as many global factors at play. At least when it comes to supply chain issues, experts have predicted the impact could linger well into 2023. That means companies will face months of uncertainty along with a stockpile of excess inventory locking in their cash; stuck in a tug of war between what they can sell and trying to dispose of what they can’t sell.

It’s clear that this inability to intelligently manage inventory is a disruptive force for retailers – both in terms of sales and their long-term profitability. The crisis is serious. In fact, 26 percent of online retailers are just six weeks away from going bankrupt if their cash flow problems don’t improve.

Clear the fog over the inventory

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

Without a way to address these cash flow blockers lurking in the warehouse—the overstocks, the out-of-stocks, and which products are either driving sales or obsolete—retail businesses struggle to intelligently solve their inventory problems. There needs to be a way to focus on sources of lost revenue, intelligently prepare for unpredictable demand spikes and troughs, and factor supply chain issues like extended lead times into purchasing decisions.

So what’s the solution? One thing is for sure – it is not included in spreadsheets. Compute something as nuanced as making predictions among so many environmental factors would be nearly impossible, not to mention time consuming.

The key lies in using solutions that drive business intelligence, such as B. Inventory planning and demand forecasting software. With it, companies can view their inventory levels, accurately forecast sales, and incorporate variables such as supplier costs and lead times in minute detail.

We know that access to this data will lead to better decision making and optimized cash flow, which is essential for survival as we enter a difficult recessionary climate.

Manual analysis and guesswork no longer serves businesses in the rapidly changing e-commerce world. It will inevitably lead to mountains of excess inventory and many doomed businesses.

New solutions like data-driven demand forecasting are needed to enable retailers to maintain a consistent inventory of their best-selling items, release their clothes, eliminate the risk of overselling, and make informed decisions about purchasing, marketing, pricing, and even staffing meeting. Then they can step out of the swing between overstock and understock and get back on the ladder toward profitability and growth.

Conclusion

Getting consumers back online will be a daunting task, but the multifaceted disruption to e-commerce makes it imperative that retailers do whatever they can to regain control of the services they provide. Your long-term survival may – and likely 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 companies, helping them be more efficient and make informed purchasing decisions that increase their bottom line.

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