To Drive Profits This Holiday Season, Retailers Need to Improve Inventory Management

Over the past three years, retailers panic-bought, resulting in more inventory on hand than at any time in recent memory.

The crimson-colored bars in the data graph below highlight the huge volume of inventory companies built up, driving supply chain disruptions.

As a result, over the past 12 months, retailers were forced to aggressively draw down stockpiles using deep discounts and incentives to squeeze margins and cash. It has been a very challenging year.

The stakes are even higher this holiday season.

Retailers face subdued demand, high labor costs and shortages. To realize a successful holiday season, it will not be enough to focus on driving sales, as central bankers are tamping down demand to engineer a soft landing.

Awful Inventory Management Caused Far More Pain Than Supply Chain Snarls in the Past Three Years

The GEP Global Supply Chain Volatility Index is a leading indicator tracking demand conditions, shortages, transportation costs, inventories and backlogs based on a monthly survey of 27,000 businesses.

Interpretating the data:

• SCVI > 0, supply chain capacity is being stretched. The further above 0, the more stretched supply chains are.
• SCVI < 0, supply chain capacity is being underutilized. The further below 0, the more underutilized supply chains are.

The key to success is to improve upstream inventory management to reduce costs, reap the benefits from low transportation costs and excess capacity in the global supply chain.

Here’s how:

1. Lower Inventory, Improve Channel Mix

As the broader economy continues to cool, maintain lower-than-usual inventory levels to reduce storage costs and be more effective at moving product through different sales channels — especially Amazon, DTC and distributors — without sacrificing fulfillment times.

2. Deploy Continuous Reforecasting

Retailers should increase the frequency of reviewing sales data and inventory levels. Learn from mistakes made in 2022 and revise sales data more often than the typical monthly schedule. Similarly, increase cycle counts and make sure that products are moving across channels as predicted. If not, adjust quickly through merchandising.

3. Avoid Mass Markdowns and Align Inventory Management with Merchandising Strategy

Do not allow inventory levels to build up. Catch inventory risks early on by frequently reforecasting for more targeted, short-term discounts, and at all costs, avoid mass markdowns. Merchandising strategies need to be more dynamic by continuously revised based on reforecast sales.

4. Re-negotiate Logistics Contracts Now

Because global transportation costs fell further below their historical average, now is the time to renegotiate logistical contracts for the second half of 2023 and beyond.

5. Longer Term, Invest in AI-Driven Inventory Management

Standard inventory management systems, built to ensure you don’t run out of stock, are insufficient to inform profit-based inventory and merchandising decisions. AI-based solutions can now help make inventory decisions because they can combine real-time demand across segments, locations, and sales channels, with marketing promotions, customer trends and demographic, supply availability and costs.

Drive Profitability, Not Just Sales

With the stark reality of lower volume sales, retailers must lower their fixed and variable inventory and storage costs and streamline fulfillment to improve cash flow and profits this holiday season!

The author, Siddharth Panandiker, is a retail supply chain consultant at GEP.