The current demand crisis will test how efficiently businesses can adapt their supply chain planning. Having capital tied up in excess stock places businesses at risk. How prepared is your business?
The increased changes in demand are creating a stock crisis for many businesses at the moment. What your customers wanted yesterday isn’t what they want today!
No matter how well you plan or how accurate your forecast is – events happen, and they will rock the supply chain! – Bill Tonetti, Executive Vice President of Integrated Business Planning at Netstock.
According to The Motley Fool, a private financial and investing advice company, “Target (TGT -3.25%) is counting on profit problems for the quarter currently underway. Namely, operating margin rates for the second fiscal quarter should slip to somewhere near 2%, down from an estimate of around 5.3% less than a month ago. The company’s warning explains that “additional [merchandise] markdowns, removing excess inventory and canceling orders” will be among several contributing factors behind the brewing profit pinch. It’s also planning on holding more merchandise at shipping ports that would otherwise be on its way to its stores.”
Businesses are still struggling with the profound effects of the COVID-19 pandemic. Supplies from countries like China are far less reliable than before the pandemic. Extended lead times, transit times, shipping costs, labor shortages, the Ukraine war, and higher interest rates will continue to disrupt supply chains.
CNN Business reports, “conditions have changed in recent months. Some stores are sitting on an excess inventory of goods they ordered from manufacturers months ago with the expectation that consumer spending would be red hot. But demand has softened as consumers feel the pressure from the highest annual jump in inflation since the 1980s.”
Businesses facing a huge excess inventory problem should revise their supply chain planning quickly to eliminate excess stock. Consumers buying habits are changing. They are no longer stockpiling on furniture, home décor, or casual clothes, and we’re now entering an era where the “lockdown lifestyle” is quickly fading.
“Department-store chain Macy’s Inc. said it anticipated the decline in demand for certain goods that were popular early in the pandemic—such as casual clothing and home goods. The shift just happened at a quicker pace than expected,” a company spokeswoman said. Macy’s also received more inventory than it anticipated as some of the constraints facing its supply chain began to ease.”
The excess inventory problem.
Excess inventory refers to products that have not been sold and now exceed consumer demand. It’s a severe problem for retailers, leading to reduced profit margins due to tied-up working capital and restricted cash flows. The main reason businesses incur excess stock is due to the lack of visibility to monitor and measure their supply chain planning.
Change affects customers and channels differently, so it is increasingly important to incorporate channel, customer, and region into the planning process. For example, when the COVID-19 pandemic first hit, beer manufacturers saw a huge shift as demand moved from on-premise consumption at restaurants and bars, to beer stores and grocery channels. Businesses that identified this more quickly were able to have the right packaging in place and avoid overstocks and shortages. – Bill Tonetti, Executive Vice President of Integrated Business Planning at Netstock.
The lack of visibility leads to inaccurate data, which results in lousy planning decisions, such as over-forecasting. If you over-forecast, you will over-order and often over-order the wrong products. If you order too many products with a short shelf-life, where demand for the product has dropped, you will have to write those products off. Businesses are also tempted to purchase a larger than usual quantity of products to get a ‘good deal,’ which puts stock levels at risk, especially if there is fluctuating demand. Another contributing factor is working with unreliable suppliers whose lead times fluctuate, resulting in too much stock arriving at the wrong time and possibly with no demand for these items.
The hidden costs of excess inventory.
It can become extremely costly for businesses to carry excess inventory. These costs can involve:
- Additional warehousing costs to store additional items
- Energy costs (for perishables)
- Insurance costs
- The risk of products becoming obsolete
- Working capital tied up in inventory costs (vs. the high price of borrowing extra capital)
- The cost of additional resources to managing the inventory
- The cost of shrinkage
What can businesses do?
Businesses need to be prepared by adapting and responding quickly to changes in the market by ensuring they have the right planning tools to respond while continuing to satisfy changing demands. If not, businesses will end up with a large amount of working capital tied up in stock for which there is no demand.
The antidote to being reactive is, of course, better planning. However, with many factors in a “perfect storm,” planning becomes extremely difficult. Those factors include global shipping issues, the China lockdowns, and the war in Ukraine. But, the better your planning tools, the better you’ll survive., regardless of how hard planning is for everyone. Even if it’s hard to plan, your spreadsheet will probably still perform more poorly than a best-practice driven planning tool – Barry Kukkuk, Co-founder of Netstock.
Five tips for managing your excess stock.
#1. Plan ahead: Use a demand planning solution with effective classification, improved forecasting, safety stock, and ordering modules to forecast accurately and place the best possible order in the first place.
#2. Offer discounts: Opt for bulk discounts or marked-down prices. Discounts can be very painful, and a good data analysis should help pinpoint the correct depth of discount to offer.
#3. Give donations: Donate your excess inventory to get a tax deduction.
#4. Re-assess your marketing and sales strategy: Reconsider your marketing and sales strategy and think of innovative ways to reduce your items.
#5. Perform a thorough analysis: Why do you have excess inventory, and are your orders aligned with customer demand and forecasts?
Hartland Controls reduced their inventory by $1 million. Read their success story here.
Disruptions to supply chains are not going to stop. Now more than ever, it’s vital to have the right tools that enables you to be reactive, and adapt to new events. Forecasting errors and supplier constraints are major factors determining why your business is holding excess inventory. Working with outdated tools to make critical inventory decisions also won’t prevent or help reduce inventory.
Discover how you can reduce excess inventory in your business today. In this eBook, you’ll learn five key steps to reduce excess inventory and enable smarter inventory decisions for your business.