How advanced analytics can end the $ 50 billion retail overstock problem
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Some retailers are facing backlash because of images showing piles of unsold inventory that have been burned or destroyed. This overstock problem is not new and retailers have tried to manage their unsold goods through donations and resellers, but there is simply too much inventory. Retail giant H&M recently revealed that it has $ 4.3 billion in overstock – an amount difficult to imagine and even more difficult to manage.
Far from being a simple financial problem, overstock is devastating for the environment. Raw materials are destroyed and a huge amount of energy is consumed in the production and transportation of products around the world. Not to mention the working hours of people, the blood and sweat that goes into every product, only to destroy them aimlessly.
This is a frustrating problem, given that it is so easy to fix. Those who embrace modern technology are already optimizing their inventory with advanced analysis, entirely preventing these massive amounts of overstock.
So, if a retailer wonders why consumers and investors are pulling out, it’s because they still use a traditional approach in a modern world.
How are retailers getting into this mess?
Whether it’s fast fashion or high-end brands, at the end of the day, the goal of a business is to maximize shareholder value. As such, retailers cannot afford to risk losing sales because they are out of stock.
The consequences of stockouts are severe, ranging from lost profits to lost customers and inevitably market share. The direct and indirect damage from lost sales is so great that retailers prefer to mark down unsold inventory or even get rid of it at cost.
Retailers are faced with the challenge of determining what the product line should be and how much of each product to purchase. On top of that, timing is of the essence, as introducing the product too late risks missing out on potential sales, but too early means incurring costs of ownership and immobilizing cash flow. These variables, along with supplier prices and delivery times, make demand planning very difficult.
Naturally, retailers will buy additional inventory to compensate for the dynamic nature of the retail industry. Unfortunately, many over-correct and bring in a lot more inventory than they can sell.
Related: The 4 Essentials Inventory
But why burn the inventory?
With growing consumer scrutiny and increased pressure from lawmakers, why would a respected retailer like Burberry still choose to destroy Â£ 28.6million in unsold clothing and accessories?
The answer is complicated, but let’s address some of the reasons:
Poor demand forecast – The main reason retailers find themselves in this dead end situation is a lack of effective planning up front. It’s reasonable to add buffer stock to avoid lost sales, but some retailers unreasonably bring in more stock than they ever need.
Brand image – Luxury brands like those of Richemont (Cartier, Piaget and IWC) create value through exclusivity. This means that they cannot make their products stand out without devaluing the brand. As a result, Richemont admitted destroy $ 563 million value of watches in 2018/2019.
Incentives – A current U.S. Customs and Border Protection program states that retailers can recover 99% of all fees paid on imported goods that have been destroyed.
Resale – Unsold inventory is often sold at discounted prices through third party resellers. This can be a great solution, but when too many products are available to the public, the public stops shopping at retail. Retailers must be careful not to stifle their own demand.
Recycling – Why are stocks destroyed instead of recycled? Not all plastics and textiles can be recycled. The majority of goods are made of mixed materials that are both recyclable and not. National Geographic reported that only 9% plastics are recycled, and less than 15% textiles according to the EPA.
Too much stock simply – There are many organizations that accept and distribute donations locally and internationally. Unfortunately, while giving may seem like the perfect solution, large-scale giving can do more harm than good. The massive amounts of stocks exported have suppressed local markets, so much so that in 2016, the East African Community (EAC) voted for ban imported clothing.
The truth is, retailers find themselves stuck between a rock and a hard place. Retailers need to know that it is possible to please their shareholders without becoming the bad capitalist.
Related Article: Amazon Destroys Thousands Of Unsold Products Every Week, Study Finds
Why should retailers be careful?
The world has changed and time is running out for retailers to adapt the way they do business. Shifts in consumer behavior and digital innovations are making previously beneficial business practices detrimental to communities and retailers.
80% of buyers in 29 countries think sustainability is important to them, the majority being ready to pay more for eco-responsible brands.
Meanwhile, digital transformation has introduced industrial innovations such as advanced analytics, which has optimized the way business is conducted. Retailers who adopt these new practices save time and money, allowing them to steal market share from traditional retailers.
We know that doesn’t have to be the case. Major retailers are already using technology to identify and fix the root cause of their inventory problems. By taking advantage of advanced analytics, these retailers were able to optimize inventory to avoid lost sales without paying the price of overstock.
So what is advanced analytics and how can it help?
Advanced analytics and AI accurately forecast demand and recommend intelligent information that decision makers can rely on.
Retailers can easily consider all of the factors described above when forecasting demand. This allows businesses to bring in the right amount of inventory, in the right mix of products, at the right time.
Perhaps mainstream retailers are put off by the complex sounding terminology surrounding AI, machine learning, and analytics. The reality is that these systems are easy to use and are becoming more intuitive every day. In fact, they provide a consistent, precise, and scalable workflow that is less prone to human error.
Thus, not only are the early adopters of this technology saving millions of dollars, but they are also having a positive impact on the environment and communities around the world.
Related Article: How AI Is Changing Business Decision Making
Retailers, it’s time to adapt.
What is really surprising is that this technology has been around for over a decade. It has been tested, proven and even considered the future of retail by institutions. Yet many retailers choose to stick with destructive, wasteful, and outdated processes. Either way, it’s only a matter of time before the old guard is swept away by the tsunami of digital transformation.