Retailers Learn A Costly Lesson By Being Overprepared

We are experiencing one of the most turbulent years for retail, without any doubt triggered by the disruption that started with COVID-19. The pandemic changed how we live, with social distancing, remote work, and the temporary shutdown of all non-essential business operations.

To ease the effect of the crisis, the US government provided loans and financial aid to millions of businesses and individuals. The excess capital on hand, combined with the mandatory lockdowns and social distancing protocols, drove an immediate uptick in online shopping and food delivery services.

The rapid and unpredictable increase in demand for many products fueled panicked shoppers to empty shelves, causing near hysteria over purchasing items such as toilet paper. In addition, lengthy delays at shipping ports meant stores would be out of stock for extended periods.? Meanwhile, freight costs swiftly increased, reaching ten times the national average during the second quarter of 2021. As a result, retailers were forced to adapt quickly or risk closing their doors for good. Those who could afford the risk began overstocking with ‘just-in-case-inventory’ rather than ‘just-in-time-inventory.’

In 2022, consumers have continued to face challenges as inflation and world events have led to skyrocketing prices.? Most notable for many, the war in Ukraine disrupted the oil and gas industry, resulting in painfully high gas prices at the pump in the U.S.?

With lower unemployment rates and a strong appetite for spending, eager consumers now face higher price tags on nearly everything. Yet, even with the Federal Reserve hiking rates to curb inflation, there has been little relief at the checkout. Instead, these events have added to the looming fears of a recession, triggering stock market prices to tumble, especially for previously high-valued tech stocks.

These disruptions and abnormalities affected the natural flow of products from manufacturers to end consumers. In addition, the models built over the years fall short of forecasting supply and demand, resulting in excess inventory problems. For example, Walmart sales grew only 3.97%, while their inventory jumped 32% between the first quarter of this year and last.

Traditionally, the holiday season is when retailers’ inventory peaks, as consumer spending is at its highest. However, this year Target and Walmart have announced excess inventory, and have taken cautionary actions such as cutting off new inventory orders or reducing existing inventory with price downs and reduced markups.

Walmart and Target are not the only retailers facing excess inventory issues. Ten of the largest retailers in the U.S. have increased inventory levels compared to previous years. Yet, for many, sales rose only a fraction. In addition, some have experienced decreased sales due to reduced demand for oversized items such as televisions and outdoor furniture. Another sign that retailers miscalculated inventory needs came in April when Amazon announced an excess warehouse space.

For both retailers and consumers, the rollercoaster year of retail continues. This holiday season, consumers may experience the lowest bargain prices they’ve ever seen. The only question is whether they will still have the appetite to continue spending.?

One thing is certain; the excess inventory issue must be addressed to create a stable economy. Some strategic moves to lessen the burden include resetting and discounting prices, optimizing cross merchandising, and getting creative with upcycling.?

In the long term, additional proactive steps can eliminate the risk of repeating these costly mistakes. For example, aligning the product volume with the demand, calculating and ordering appropriate inventory levels, allocating onto the proper channels, and distributing to the correct locations are part of a well-defined approach. In addition, commerce management platforms will connect more data points from every aspect of the commerce ecosystem. These flexible systems are architected to handle changes and disruptions with an established channel diversification infrastructure for both the operations' demand and supply side.?

With the right tools, it is possible to create an efficient and profitable process that will lower inventory levels and create more sustainable operations for manufacturers, logistic networks, distribution centers, brands, and retailers.?