The importance of inventory management

Inventory management has always been one of the most important aspects of retailing. Recent events have proven that it is one where retailers can never afford to become complacent.

Inventory doesn’t just refer to stock that is in stores. The term includes all of the products that a retailer owns and plans to sell, including those in the process of being shipped or returned, and also products with long lead times that have been ordered or commissioned from suppliers.

The bigger the retailer, the bigger the sums of money that are tied up in their inventory.

retail employee doing manual inventory at a retail store

Retailers have always sought greater flexibility over their inventories. The ideal might be to increase their selection of ice cream when the sun shines, or quickly display stocked umbrellas when it rains. But with even the simplest supply chain involving advanced orders, retailers can never react quite that quickly.

Instead, their goal is to get the best advanced forecasting available and build as much flexibility as possible into ordering processes. But, at some point, they all have to press the button that confirms an order and sets a series of processes in motion.

From there, retailers need to ensure their inventory is in the right place at the right time. Failure to do so can mean out-of-stock items, when customers find empty shelves, or unsold stock that the stores must dispose of.

Product shortages and changing consumer spending

In the recent past retailers faced a ‘dual shock’ to their inventory systems, and many are still recovering from it.

The challenges of the Covid-19 pandemic, combined with other supply chain challenges such as the war in Ukraine, created shortages of products that retailers struggled to cope with. This meant empty shelves, missed sales, and unhappy customers, until the system caught up or alternative arrangements were made.

A sharp rise in inflation and changes in consumer spending followed. Global financial institutions, such as the US Federal Reserve and the Bank of England, initiated a cycle of increases in base interest rates designed to bring down inflation. These further discouraged consumer spending by putting up the costs of loans and mortgages.

This left those same retailers with unsold stock. Many had overstocked with products because of the shortages that had gone before.

According to McKinsey & Company, retailers in the US alone are sitting on $740bn worth of unsold goods.

These two extremes tested the inventory control of even the most organized retailers and highlighted that there might always be things beyond their control that will complicate operations. Indeed, retailers can suffer a shortage of some products and an excess of others at the same time.

There are still gaps on shelves. Data from Retail Insight, published in August 2023, found that 82% of UK shoppers have been affected by out-of-stock products in the last 12 months, up 11% on the previous year.

Emphasizing the importance that retailers have a firm grip on the elements of inventory they can control. This means careful recording and measurement, and an eye to issues such as shrinkage, to make sure that retailers know exactly where their inventory is at any given time.

The impacts of inaccuracies

Failures of inventory control cost money and disappoint customers, often at the same time.

Having too few products, or failing to get those products to the shelf, can mean products go out of stock. If customers are unable to buy the items they want, they are disappointed. They might choose an alternative product, or go elsewhere to seek what they want. They might even abandon an entire basket of goods if a key item is unavailable.

Customers can get especially annoyed if they are trying to buy an item that is on promotion. When retailers create an expectation and then fail to meet it, it is annoying for customers, and that damage is compounded if a third-party supplier is involved: they lose out on sales too.

Grocery Store Customer Employee Assitance

The opposite of running out of a product is ordering too much of it. This leaves money tied up in inventory, which has to be stored or sold off cheaply. Either solution costs money. The situation is complicated if the product is perishable or has a shelf-life limited by other factors such as fashion or relevancy. For example, if summer clothing hasn’t sold by the end of the season it cannot be kept for next year.

The combined cost of these lost sales and disposals is known as inventory distortion, and it has reached alarming levels.

Figures from IHL put the cost to global retailers at $1.77T. With 68% of that figure caused by out-of-stock items.

For European retailers, it means that losses due to inventory issues equate to more than 7% of total sales value. This statistic does not recognize the damage done to the customer experience (CX), and the long-term implications of that.

Mounting challenges

For many retailers, 2022 and 2023 were spent reducing inventory and introducing new strategies to avoid figure excesses. In 2024 they still face an uphill struggle, and one that is increasingly complicated by the demands of omnichannel retail.

For example, figures from Manhattan Associates Inc find that retailers increasingly offer consumers the ability to buy items in-store and return them online, or to order online for collection in-store. Yet it finds that inventory records about the location of products are only correct 70% of the time.

Hardworking warehouse worker relocating boxes in the storage compartment.

There are numerous causes of inventory distortion. The largest is issues with suppliers which, according to IHL, accounts for worldwide costs of $417.7bn annually. In addition, hundreds of billions of dollars of costs are caused by factors such as human error, ineffective procedures within retail chains, and theft.

The same research from IHL calculated that for every item stolen a retailer must sell 15 additional items of the same value to make up for the loss.

Despite the increased digitalization of the entire supply chain, human error remains a substantial factor in inventory error. Misreading labels and simply putting things in the wrong place can lead to a chain of further mistakes that ultimately lead to lost sales. While it is easy to blame theft, it is thought that human error accounts for 25% of shrinkage in the supply chain.

This factor can be reduced by stronger inventory control measures, which make it easier to pinpoint when and how items go missing.

Lifting the inventory fog

Just as inventory distortion is caused by many factors, it can be tackled in many different ways. Sophisticated technology and advancements in artificial intelligence are helping to tackle the demand forecasting challenge. The analysis of large and complex datasets can help identify patterns that are hard for humans to spot for more informed decision-making.

But big gains can also be made by better tracking of inventory as it goes through a retailer’s store and into the customer’s hands. Solutions related to this challenge can involve relatively light investment and can capitalize on existing resources.

Ultimately, knowledge is power when it comes to inventory management. Being able to tell where a product is and when it needs to be somewhere else may sound simple, but when hundreds of stores and tens of thousands of SKUs from hundreds of suppliers are involved it becomes a massive task.

Smart data capture technology, an increasingly familiar sight in stores around the world, is one of the most effective ways to help retailers ensure accurate inventory management.

Smart data capture can enrich existing experiences across complex workflows, like supply chains, in a seamless and digitally led manner.

Spencer Izard, PAC’s Research Director

Empowering store associates to record and monitor inventory as they go about their everyday tasks allows companies unparalleled oversight of where individual inventory items are in their supply chain, right up to the moment they are put on a shelf.

The automation of repetitive – often boring – tasks while receiving and merchandising products ensures greater speed and accuracy. While error-proof data capture helps avoid the proportion of shrinkage that is assigned to human error.

Providing store associates with real-time data coupled with theft-prevention technology can help alert them to transactions that are more likely to involve theft and where oversights might be occurring – and allows them to take action to put things right.

Such are the volumes of products and cash involved that the one option that no retailer can consider is to do nothing. Learning more about exactly where their products lie has become imperative.

If you would like to know more about how Scandit is solving inventory issues for leading retailers, we recommend reading our blog on 5 ways smart data capture helps with inventory distortion.

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