The COVID-19 pandemic has had lasting disruptions on inventory levels and supply chains for retail stores.
A combination of changes in demand for certain items based on being quarantined, as well as disruptions in shipping and production, led to inventory shortages. In many cases, inventory was delayed and arrived late and out of season.
Demand then changed due to a re-opening of the economy. This fluctuation resulted in combinations of shortages and excess inventories.
Now, add in the inflation on essential items, such as energy and food, and the demand for many consumer goods has disappeared—resulting in excess inventory for many items.
This post is based on the Supply Chain Brain article, U.S. Retailers Plan Big Discounts as Inflation, Inventory Add Up , by Bloomberg, June 16, 2022, and the YouTube video in the Spotlight. Image source: William Potter/Shutterstock
1. Why is excess inventory a negative factor for companies?
Guidance: Excess inventory hurts a retail store’s financial performance. Retailers hope to have fast moving items. Slow moving items incur costs for holding them in inventory.
For most items, Inventory costs about 25% of the value of an item to store it for one year. This percentage probably will increase as the cost of borrowing rises with inflation. Additionally, retailers have an investment in this excess inventory. Their money could be used for faster moving items to gain a better return on investment. Also, excess inventory is taking up space in retail stores and warehouses. This space could be better used for faster moving items.
2. Why cut prices to move excess inventory?
Guidance: Retailers have two basic choices for what to do with excess inventory. One choice is to store the items for future demand, which results in added inventory costs, and takes up valuable space in warehouses and stores that could be used for faster moving merchandise.
The other choice is discounting. Discounted prices allow retailers to get some of their money back from the clearance sales and invest it in inventory that is moving faster. It also opens up space in their warehouses and retail stores. A final benefit is that discounting can attract customers to stores, where they may purchase both clearance items and items that are not on sale.
3. What can retailers do to prevent excess inventory?
Guidance: Since the start of the pandemic, managing retail inventory has been very difficult. Changes in demand patterns coupled with volatility in the supply chain have made effective inventory management almost impossible.
First, retailers need to look at their forecasting methods to ensure that they can identify changes in demand patterns. Increased accuracy in forecasts will lead to more effective inventory management. Increased visibility in the supply chain can help them anticipate problems—letting them develop contingency plans as disruptions occur.
Because of shipping issues, parts shortages, plant closures, and labor shortages, existing supply chains have increased the lead time to deliver inventory. This places a heavier importance on accurate forecasting during a time when demand patterns are changing. Shortening the supply chain could reduce the need for greater forecast accuracy. In addition to shortening the supply chain, many companies are looking to add flexibility to it. Greater flexibility can help retailers move production to more stable areas as disruptions occur.