Future of Commerce Blog

Inventory Overstocks and Under-stocks: How to Fix Them

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Departmental silos are a challenge that many growing businesses face, and the retail industry is no different. In fact, according to Retail Wire, one of the top five most common causes of overstocks are “data disconnect/systems.”

Yikes.

That’s why it’s important to use tools across your business that sync and integrate with one another, as well as provide automation and customization features to help you save time and keep teams on the same page.

Your inventory management is just one area to examine when analyzing the cause of these disconnects. The IHL Group and OrderDynamics found that 15 percent of inventory distortion issues are because the software can’t talk to each other. We chatted with Neil Abbruzzese, CEO of EDI Options, about why and how you need to address inventory processes to avoid stock issues.

The Importance of Connecting Inventory Processes

We already know that many stock issues are caused by disconnected processes, but how does that affect your business on an operational level? And more importantly, what does this mean for your bottom line?

Let’s have a look at the numbers:

  • Retailers lose $1.75 trillion annually because of out-of-stocks, overstocks and returns (Entrepreneur)
  • Shrinkage cost retailers $60 billion in 2015 (Forbes)
  • Retailers can increase profits 50 percent with careful inventory management (CNBC)
  • In 2017, shrink cost retailers nearly $100 billion globally (Tyco Retail Solutions)

Additionally, when inventory processes are broken, this can have a ripple effect on the rest of your business. You might be facing data inaccuracies and not know how much you have on hand, or how quickly it’s selling. Then you can’t map forecasted demand to product lead times effectively. The more you disappoint your customers, the more they’ll turn to your competitors, and the more you order too much stock, the more capital you’ll have tied up.

Why Your Inventory Management Is Out of Sync

Inventory complexity

For growing retailers in particular, inventory management quickly becomes more complex. “Retailers have several levels of inventory to manage,” says Abbruzzese. “There’s store-level inventory, distribution center inventory, and inventory that they’re managing from third parties.”

As you introduce more channels, locations and team members (both internal and external), processes must grow and evolve as your business does. But knowing what you have in a multi-location, multi-channel business is easier said than done.

“There are a lot of moving parts for retailers to get under control, particularly now, with many moving into direct-to-consumer,” Abbruzzese says. “[Retailers must manage] the inventory of the third party or the vendor, as opposed to managing inventory that they physically have control over.”

Outdated processes and tools

You might be using legacy systems that haven’t been updated in years, or processes that you’ve implemented when you first started your business. If you don’t reevaluate as your business grows (and thus, your needs change), then you’ll risk using software that doesn’t have the automations, integrations or features you need to run your scaling business.

Look for tools that constantly roll out upgrades, updates and new integrations — tools that grow with their customers. They will be most able to accommodate your needs now, a year from now and hopefully into the future.

Abbruzzese recalls a relevant exchange that occurred at a business event he recently attended. “The moderator was asked, ‘We spent $30 million on control systems five years ago, what value can I still get from those systems?’ The moderator responded, ‘Five years is an eternity in processing.’ What that told me is that in this day and age, the software has to change with the times.”

Related: 5 signs you’ve outgrown your current inventory management software >

How to Clean Up Your Inventory Management Processes

First thing’s first: You’ll want to find the inventory management software for your retail business. Remember to look for something that will manage inventory across multiple channels and integrate with other tools you use in our business (like accounting or warehouse management software, for example). This will help maintain the integrity of your data. Automations are another key feature for fixing broken inventory management processes.

Once you have your systems in place, you can identify and focus on your problem areas. Here are some tips and resources to help you get started:

 

Sales velocity = total dollars of sales / Annual Industry Volume (AIV) in millions where selling

Ultimately, though, Abbruzzese says it comes down to how disciplined your team is in inventory and data management. “If a company is very disciplined and has measurable circumstances that they can look at on a recurring basis to know what their inventory snapshots are, then they’re able to manage inventory far more effectively,” he says.

Up next: Learn from the best — Freda Salvador empowers their marketing and operations teams simultaneously, thanks to their inventory management processes >

Ellie Kulick

Ellie is an experienced Marketing Communications and Content Specialist based out of San Francisco, CA. Passionate about technology and health, she is constantly looking for new challenges in effective communication and creative content development to help businesses grow and engage with current and prospective customers.

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