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July 28, 2020

Rethinking Inventory Management in the Age of COVID-19

Rethinking Inventory Management in the Age of COVID-19

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With some brick and mortar retailers returning to operation for the first time since COVID-19, the impact of a prolonged period of supply chain disruption is starting to show. One concern topping the list for many is how to find the sweet spot in inventory management.

Even before customer traffic started to return, the problem of overstocking was becoming an elevated issue. It’s not surprising, given that stores were forced to close with stockrooms full of inventory—which then prompted retailers to limit their exposure by cancelling future commitments.

Now, retailers are adjusting their inventory strategies to take a more cautious approach: narrowing assortments, tightening controls, and increasingly looking for greater visibility over how to stock inventory.

COVID-19 Impact on Inventory-to-Sales Ratio

Retail inventory-to-sales ratio, which looks at how much inventory is being carried in comparison with how much is being sold, reached an 18-year high in April—a clear outcome of COVID-19. The increase in e-commerce sales was not enough to make up for the store closures. In fact, it left many businesses heavily overstocked. As a result, this forced many to put inventory into storage or clear it at low prices that heavily impacted margins.

For instance, Macy’s Inc. wrote down about $300 million for the first quarter, flagging merchandise issues; Kohl’s cleared large volumes, cutting their gross margin from 38% in 2019 to 17% in 2020 for the three-month period ending May 2.

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The fallout of overstock, combined with the ongoing uncertainty in customer traffic and buying behavior, has put retailers in a tough spot. Illustrating the point, Nordstrom Inc. recently told the LA Times that its stores were relatively bare of products soon after reopening because of a more “conservative approach” to stocking, to avoid being saddled with excess goods. Gap Inc. has also said it has tightened its inventory and is holding some items for next season.

The Fallout From Lack of Visibility

In reality, inventory management is nothing new for retailers—particularly given the trend toward ever broadening product assortments. The typical strategy has been to hold safety stock, building an inventory buffer to account for potential inaccuracies in forecast or supply chain disruptions. The downside: This has led to excess stock, resulting in price discounting or write downs; it can also mean lost sales due to low availability when safety stock levels are not high enough.

The root cause of this problem is a lack of real-time visibility over stock to drive planning, replenishment, and purchasing processes. According to an April 2020 study from Blue Yonder and University of Warwick, only 8% of retailers refresh their demand planning processes on a real-time basis. More than one fifth (22%) of retailers currently use spreadsheets to manage these processes, but almost three quarters (74%) want to switch to a more autonomous technology in the next five years. What this means is that retailers do not currently have the tools to adjust their inventory planning quickly to react to changes in demand.

Taking an End-to-End Approach

Accurately knowing the stock that is on-hand in stores or warehouses in real time is useful to drive planning processes. However, there still exists a gap upstream in the visibility of inventory that is in transit from the supplier. And that’s where the value of being able to gain an end-to-end view into purchasing processes lies.

With Flexport’s platform, retailers have visibility into their upstream inventory in real time. SKU-level data with quantities and delivery timelines can be built into planning processes to give a much more accurate end-to-end picture of stock. And, by connecting suppliers on the platform, working from a single source of truth for inventory, they’re able to act more decisively and communicate more quickly between supply chain partners. This moves the problem of inventory management from a static offline process to a more dynamic real time process—enabling retailers to react much more quickly to a changing environment.

In fact, according to BCG, 15%-30% of reductions in working capital can be achieved through better end-to-end visibility of inventory in the supply chain. The reasoning: Retailers can influence control over inventory in-motion; orders can be pushed forward or pulled back, and transit times can be sped up or slowed down by choosing different transport modes.

To learn more about how technology can better support forecasting and supply chain visibility, watch our video.

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