Hidden Costs of Poor Inventory Management
Questionable inventory planning decisions cost U.S. retailers big in 2018. How much exactly? A staggering $300 billion in revenues due to markdowns, according to a new report by Celect and Coresight Research, Revealing the Hidden Costs of Poor Inventory Management.
Retailers face an array of challenges around managing their inventories in today’s competitive market. Surveying more than 200 senior retail decision makers, the report explores top areas of concern around inventory decisions and the correlation to common metrics such as full-price sell-through, markdowns, stockouts and margins.
Inventory Mistakes Are a Costly Problem
The report shows that there are many reasons retailers mark down products, and the amount of revenue left on the table is concerning — around 12 percent of all non-grocery retail sales, in fact. Unlike promotional activities, markdowns are always a result of something unplanned.
In this survey, almost half of respondents (46 percent) indicated that overbuying inventory and buying the wrong type of products are top contributing factors to markdowns. In addition, almost one-third (31 percent) noted external factors such as unseasonal weather, sudden consumer behavior changes, competitor promotions, etc., as a prime culprit for markdowns.
A Huge Opportunity for Bigger Margins
Digging further into the costs related to inventory mistakes, the survey found that only 60 percent of all U.S. non-grocery sales are made at full price. This is true of apparel retailers as well — they're feeling the heat from a hypercompetitive selling environment and seeing their full-price sell-through rate top off at 60 percent as well.
The opportunity to stop revenue losses is even more dramatic for retailers selling both online and offline. While in total, approximately half (49.5 percent) of all non-grocery retailers sold 70 percent to 100 percent of their inventory at full price, less than a third (28.5 percent) of multichannel retailers sold 70 percent to 100 percent of their inventory at full price. As the pressures faced by retailers will only get more intense, it's time to improve retail inventory management practices.
Advanced Analytics Are the Key to Making Better Inventory Decisions
There's no denying that a host of factors impede retailers’ ability to sell goods at full price. Those factors include increasing competitive pressures thanks to the rise of direct-to-consumer brands and internet pure-play retailers; seemingly unlimited channel options; a surge in shopper data; hard-to-influence consumers; and more frequent promotions. However, artificial intelligence (AI) and advanced analytics are set to play a huge role for retailers that want to make accurate inventory demand predictions to fuel the merchandising process.
An overwhelming majority (86 percent) of the retailers surveyed identified specific ways in which advanced analytics can help their retail sector sell more product at full price. They view this technology as a core driver behind decisions around how much inventory to buy, what to stock in stores, and optimal promotional schedules.
The sheer complexity of retail in 2019 is continuing to pressure retailers to make smarter merchandising decisions. However, there are ways to tackle the seemingly unpredictable inventory beast. Advanced analytics can allow for better store performance, higher margins, and more agile adaptations to consumer preferences and competitor activities.
John Andrews is CEO of Celect, an inventory optimization solutions provider.
