Inventory Management: How to Avoid Overstock and Stockouts While Maximizing Profits

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Published August 2, 2022

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Manufacturing and shipping delays and shifting customer shopping habits are continuing to pose issues for inventory planning. Retailers that rushed to restock shelves amid ongoing supply chain disruptions are now stuck with excess inventory—an average 30-50% more than the previous year—and all of the costly consequences, including massive markdowns and additional storage expenses and requirements. This comes at a time when rising labor, space and freight rates and record-high inflation are already cutting into profit margins.

While excess inventory can lead to profit loss, the opposite can also have a negative impact on the bottom line, with NielsenIQ reporting that U.S. retailers lost over $82 billion in sales in 2021 due to out-of-stock items. Stockouts are also one of the top reasons for a bad customer experience, which can lead to additional profit loss for retailers.

So how can retailers improve their inventory planning strategy to maximize profits and meet changing consumer demands? Below are five tips to help companies strike the right balance of inventory.

Utilize advanced inventory optimization software. Since relying solely on past sales history is no longer adequate to properly predict future demand, savvy retailers are starting to deploy sophisticated software solutions that use machine learning and artificial intelligence (AI) to provide valuable insights and improve inventory forecasting. With real-time visibility into the entire supply chain network, retailers can quickly identify and react to any potential disruptions or delays to ensure they have the right amount of inventory available in the right place at the right time. These platforms also provide critical data on customer preferences that can help companies improve inventory planning and service levels.

Optimize product and category assortment. While consumers have become accustomed to endless product choices thanks to Amazon and other online marketplaces, recent supply chain disruptions have prompted a rise insubstitutable products, with eMarketer reporting that more than 50% of consumers bought a different brand than usual due to out-of-stock products last year. This decline in customer loyalty, combined with ongoing disruptions and rising prices, highlights the need for retailers to optimize category and product assortment to avoid inventory stockouts and lost sales.

Diversify your supplier and transportation network. Inventory issues can occur anywhere in the supply chain, from manufacturing to last-mile delivery. Disruptions can vary in severity and range from a single local event like a labor strike or natural disaster to a worldwide pandemic like COVID-19. Companies should identify and build relationships with suppliers and vendors in additional geographic locations and closer to home to ensure they can continue to meet customer demands in the face of disruption. Since onboarding a new supplier can take up to a year or longer, it is important to start the process early to avoid any potential service interruptions. Similarly, retailers should also expand their distribution and transportation options, as port congestion, driver shortages and rising fuel and freight rates continue to create additional challenges and delays for fulfillment operations.

Embrace an omnichannel strategy. Despite pressure from activist investors, retailers that have successfully integrated their e-commerce and brick-and-mortar businesses—such as Macy’s and Kohl’s—are experiencing many supply chain advantages. Omnichannel retailers can utilize their existing brick-and-mortar footprint as an extension of their distribution centers, especially at a time when space and labor are scarce, or in the event of disruptions such as manufacturing or shipping delays. With the help of an advanced inventory management system (IMS), companies can manage stock across all stores and warehouses and ship items to other locations or directly to customers to avoid stockouts while reducing delivery times and costs. Low-traffic stores with unused space can also serve as micro-fulfillment centers or forward stocking locations to increase storage capacity and delivery speed to customers. While an omnichannel approach offers many advantages, it also creates more complexity in inventory management, so companies should have a robust software solution in place and/or speak with an experienced supply chain consultant before implementing this strategy.

Deploy automated solutions. Warehouse automation, including robotics, material handling and software solutions, reduce touches, human error and cycle times, enabling companies to increase speed, accuracy and efficiency. When installed in a distribution center, software tools such as warehouse management systems (WMS) and warehouse execution systems (WES) can determine the ideal mix of labor, equipment and processes to optimize the flow of goods. With labor rates and shortages on the rise, companies can also leverage automated material handling equipment and robotic systems to improve inventory management, maximize throughput and reduce costs.

Since many disruptions cannot be predicted, companies should focus on incorporating technology, flexibility and automation into their supply chains to ensure they can continue to meet their customers’ expectations and reduce costs. Contact us today to learn how to optimize your inventory management strategy to gain a competitive advantage and maximize profits.

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