The issue of unsold inventory, an enduring problem for the retail industry, has become ever more pressing with Covid-19. Adding accuracy and responsiveness to the planning process has never been more urgent.
The notion that the fashion industry has an inventory problem is not news. Predicting demand and stock levels for a sector driven by trends, rapidly changing customer habits and impulse buying is without question a daunting task. As Business of Fashion reported in a 2017 article, dead inventory in those days cost the US retail industry as much as $50 billion per year.
But what is ‘dead’ inventory? How can we define it? Dead inventory is basically stock that won’t sell, and that is not good for the store. For example, it is stock that can’t be displayed because it’s out of season. Or it is inventory that is insufficient in sizes to be displayed and meet customer demand.
With the pandemic causing extreme demand unpredictability and disruption of supply chains, dead inventory has become an even bigger issue. When the outbreak first hit in early 2020, ‘non-essential’ retailers around the world found themselves with vast quantities of unsold products to manage, left within their stores or somewhere in their warehouses or on rails or ships.
As shops reopened, retailers applied markdowns to contain losses, but in general, and despite these actions, the amount of dead inventory was massive.
Now, as many retailers are still in the recovery phases and lockdowns loom in many parts of the world once again, dead inventory remains an urgent (if not more urgent) matter. As the crisis altered customer habits and accelerated omnichannel buying, it was even more complex for retailers to have the right inventory in the right location at the right time. The result: many retailers now have inventory in the wrong place.
The cost of dead inventory is not just the purchase cost of the product plus the (typically onerous) handling costs. The opportunity cost (the missed opportunity to sell the item) must be added to the equation. When not managed properly, dead inventory can become the silent killer for retailers, squeezing working capital and the bottom line. “Accuracy of procurement and placement, and consistency of best-practice execution, have never been more urgent,” notes Gartner.
Reducing dead inventory costs: actions to take
Most of the retailers we are talking to are not standing still and are working to reduce the costs of unsold inventories. Knowing that another lockdown could happen at any moment, retailers are trying to infuse the supply chain with less stock to avoid obsolescence risks. In parallel, they are working to manage their merchandise with higher accuracy.
Retailers recognize that by improving their merchandise and inventory precision (how much to buy and place, when and where), they can produce a strong, positive impact on the bottom line and free up resources for other business-critical activities, such as investing in digitalization.
In fact, Gartner recently predicted that by 2024, “Tier 1 retailers in North America and Europe will reduce inventory carrying costs by 30%, dramatically improving free cash flow for digital investment, while revamping balance sheets.”
But what does it take to get there? Actions that retailers should consider in order to reduce dead inventory include:
- Think of new ways to code ‘old’ inventory versus ‘new’ in order to increase visibility of inventory that is at risk of becoming out of season, and monitor it more closely.
- Create one pool of stock for all channels and have demand signals determine where the stock should go — serving one shop or the other, as well as online.
- Enable inter-store transfers, moving inventory where demand arises.
- Allocate less and replenish more. Pre-pandemic, retailers tended to buy large quantities of products and allocate those to the network with a ‘fire and forget’ process, in which decisions were made and never revisited. In today’s pandemic scenario and beyond, retailers need to elevate their ability to predict demand as well as quickly adjust those predictions over the sales period based on true customer needs. The approach retailers should adopt is ‘push-pull-push’, where a conservative initial allocation (push) is followed by monitoring and forecasting of actual demand (pull) and then by demand-led replenishments (push).
Last but not least, let me share a more cultural-related tip: Let’s stop calling it ‘dead’ inventory. You can choose a code for example, but we don’t want any product to be considered ‘hopeless.’ Every piece of inventory can be sold — it is valuable to the business and deserves the right attention.
For more insight on the topic of dead inventory, check out my recent Candid Conversation with Dave Bruno below: