Inventory planning mistakes retailers can learn from the year 2022 and avoid in 2023

What would the retail industry look like in a perfect world??

Maybe it's stocking the right amount of inventory so that customers are never left empty-handed. Or it’s fulfilling online orders quickly with same-day and two-day delivery options to meet customer expectations efficiently. Possibly even preventing year-end markdowns by carefully framing reordering cycles and ensuring there is no excess inventory left over.?

The reality, however, differs significantly from the ideal retail scenario.

The most stubborn, expensive issues retailers face are due to poor demand forecasting. Often, when retailers make inventory decisions, real-time data is not incorporated, resulting in inaccurate inventory planning. There must be enough inventory available to meet demand without having overstock. The problem is that many retailers rely solely on their gut feelings and outdated data insights when developing inventory plans.

There were highs and lows for retailers in 2022, but one thing remained consistent: inventory problems. Retailers faced many challenges, ranging from inventory shortages to moving excess inventory.

Let's review some of the greatest challenges in 2022:

At the beginning of the year, the retail industry was still dealing with the effects of the Covid-19 restrictions. The pandemic shifted customer demand away from services toward goods, which left retailers unable to keep up with demand. As several factories were closed, retailers were hit by persistent supply chain issues and inventory shortages. Reduced supply, just as demand was rising, also led to increased prices of products. Many retailers switched vendors and suppliers to solve the problem, and many national retailers expanded their manufacturing operations in their home countries. Retailer profit margins declined as uncertainty dominated the industry.

By the second quarter, supply chain issues slowly started to ease up; fearing a similar situation of the inventory shortage, retailers placed their bulk orders. As the problem of inventory deficit gradually resolved, stores were now up and running. Stocked-up retailers were expecting their long-awaited revenue streams to start flowing again. As a result of inflation, mortgage interest rates also spiked dramatically, resulting in a steep decline in customer demand. Customers started to reduce their purchases of discretionary items to manage their finances. This left a lot of retailers burdened with excess inventory.

During the third quarter, retailers focused on reducing excess inventory. Retailers were caught in a trap of overstocked inventories and low demand. As a result, many retailers were forced to cancel orders they had placed with vendors. Low demand remained an issue, and the only solution to fuel up demand was to lower prices.

The fourth quarter finally resulted in favorable outcomes for retailers. Almost every retailer had been dealing with excess inventory despite canceling vendor orders. To deal with the inventory surplus, retailers significantly brought down prices which then simultaneously accelerated customer demand. As a result, customers continued to spend. Despite reducing retailers' profit margins, high discounts and deals have helped them resolve inventory problems.

With this 2022 review in mind, here are some key takeaways and recommendations for retail businesses.?

1. Data-driven inventory planning: Decision-making is done based on real-time insights from datasets. All these challenges have made retailers realize the importance of having access to new-edge technology for keeping track of inventory levels. A data-driven approach to inventory planning is no longer a choice but a necessity. Driving trend analysis and planning each season’s assortment will help retailers make the right decisions at the right time.

2. Backorders: Customers want to access the newest styles and trends, but everything cannot be in-stock all the time. Retailers who are not leveraging Backorders and are instead trying to stock every single item are often burdened with 25-30%+ excess inventory. The best solution to this problem is accepting Backorders. The strategy serves as an excellent opportunity to encash future inventory. By implementing the Backorder strategy, retailers can ensure increased revenues and lower overhead inventory costs.?

3. Pre-Orders: Accepting Pre-Orders helps retailers forecast demand for soon-to-be-launched products. The strategy gives retailers a realistic impression of what sizes, colors, and options must be offered. Therefore, retailers order the right quantities of products from vendors. As a result, the absence of excess inventory will also lead to fewer markdowns at the end of a season.

4. Buy Online and Pick-up In Store:? In response to pandemic pressures over the past two years, BOPIS has become a critical strategy for retailers. Optimizing retail locations has become important, especially for those with a large percentage of their business in the eCommerce space. BOPIS is a natural extension for eCommerce retailers, offering a new opportunity to reduce delivery times and let online customers access the brand experience first-hand. Additionally, when a BOPIS order is rejected from the store, retailers can identify inventory variances and ensure that inventory is accurately maintained across all channels.

5. Ship From Store: Modern customers demand more options, including BOPIS and same-day delivery via Ship From Store. Key initiatives like Ship From Store not only provide faster delivery but also enrich the customer experience. Amid uncertain times like the COVID-19 pandemic, Ship From Store can help retailers meet customer needs and improve channel inventory movement.

In 2023, retailers must abandon traditional legacy practices to adopt innovative strategies. Adopting data-driven strategies and implementing omnichannel solutions has become a requisite in the retail industry. Decisions based on real-time data will help identify concrete insights, and adopting omnichannel strategies will help retailers quickly move their inventory and increase their conversion rates and profitability.?