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‘Just in time’ and ‘just in case’ systems leave retailers with too much inventory
This is the fifth in a series of articles from members of RetailWire’s BrainTrust panel speculating on coming retail trends and developments for 2023.
Too many retailers had the bad habit of over-buying long before the pandemic created the supply chain chaos we are still living through. “Just in time” systems failed to prevent the overbuying problem.
“Just in case” thinking was supposed to prevent inventory outages and shortages. That seemed to have backfired. Retailers were announcing over-stocked positions starting in late spring and have been trying to promote their way out of the problem ever since. It’s unclear as we sit here in mid-December whether or not it’s working.
It’s hard to walk the sales floor on Black Friday or December 26 and gauge if inventory levels are in line. On the other hand, it’s easy to walk the floor on January 31 and make the same judgment. I’ve done precisely that several years in a row and I am shocked each year by the level of prior season residue inventory that is still sitting on the floor, at a moment when the vast bulk of holiday and sale shopping is over and done. The level of discounting required to clear all this prior season inventory requires selling it close to or below cost. It’s a profit killer!
The other way to express this issue is to talk about seasonal conversion. Exiting a season is equally important to starting a new one. The initial floor set is the easy part. But the buy must be smart enough that it can sell down at the seasonally appropriate time.
What’s the cure? It starts with better planning and merchandising, improved storytelling and less breadth and depth of SKUs. Assortment creep always happens when merchandising teams want to hedge their bets. There is comfort in more. There is discomfort in editing great work that the design team has produced.
Higher confidence would come out of more complete data and shorter manufacturing lead times. And the data would be available if the lead times were shorter. But shorter lead times are a huge ask right now. Discipline on the merchandising side is required. Flexibility on the manufacturing side is going to be the hard part.
Apparel will always be a hit or miss game, but retailers have plenty of data telling them they need to buy less to be more profitable. Create and manage scarcity!
Discussion Questions
DISCUSSION QUESTIONS: How will retailers digest this season’s sales, margin and inventory outcomes to arrive at better demand forecasts for Fall/Holiday 2023? What different tools and thought processes are needed to yield better inventory flow, stock levels and more profitable outcomes?
Poll
Loading …BrainTrust
Mark Ryski
Founder, CEO & Author, HeadCount Corporation
Bob Phibbs
President/CEO, The Retail Doctor
For some retailers, the inventory problem will be a hangover that they’ll be dealing with for several quarters to come. And as rightly pointed out in the article, this is especially the case with apparel which can be hard to resolve. Sell through still guides buying decisions, but I argue that tracking SKU-level conversion rates would provide a more meaningful demand signal for any given SKU than merely analyzing sell through results. If the last two years have taught retailers anything it’s that the old ways of looking at inventory just don’t provide the level of insights retailers need.
I am an advocate of trying to shorten lead times to create flexibility should things go poorly or very well. Merchandise planning, accompanied by a strong discipline rather than emotional reaction, is key — not just in difficult times, but all the time. I would prefer some lost sales due to disciplined buying (NOT “just in case”) and remaining profitable, over marking down large amounts of merchandise and breaking even.
The margin compressions, rising operating costs, inflationary pressures, global economic uncertainties, and global supply chain challenges have contributed to the over-inventoried positions that retailers, especially in the middle, are experiencing. Inventory, unlike fine wine, does not improve or get enhanced with age. Mass markdowns and aggressive holiday promotions are necessary levers to help mitigate the sheer amount of inventory retailers have built up.
Moving forward, retailers must leverage a more prescriptive, predictive, adaptive, and agile merchandising, assortment planning, inventory management, and supply chain forecasting strategy to shift rapidly to changing marketplace conditions. Additionally, consumers are adapting to a world where they are more than happy to leave the retail store without a product in hand and a promise to pick up the items at a later date or have them shipped to their homes.
The days of retailers stacking items to the ceiling have to end. In the age of sustainability initiatives and conscious consumerism, it’s high time for retailers to drive inventory optimization strategies across all shopping channels.
Retailers are wired to never miss a sale, or an opportunity. In my opinion buying “one more SKU” or adding in a bit more inventory just in case sales take off are the two highest risk purchases that retailers can make. Can you imagine the Monday morning meeting where everyone comes in and notes that everything planned was sold, margins are exactly as expected — yes there was a missed opportunity to sell more, but we’re quite content with empty shelves and full bank accounts. Never happen.
Peter, to quote Jeff Sward’s title quip, as many as forty years ago, “just-in-time” purchasing and delivery was the goal but “just-in-case” was how we non-merchants referred to buyers’ other “irrational exuberance.”
This is not a new problem. Years of cutbacks in store personnel and training have led to this. Get more trained people on the floor to sell the merch when it is full price. Discounting is because no one felt anything with your shopping experience. No one helped them, and the merch had to do the heavy lifting of trying to get someone to buy. Unless you want to stay an “asked and answered” retailer like a hardware store, you will give up the two things people go to stores to do — connect to people and discover. Until then, people will focus on the wrong things.
My logistics professors back in the early ’90s repeatedly made the point that in a competitive system with imperfect information, it is literally impossible to achieve perfection – yes you can hit profitability and sell through while leaving customers unsatisfied, but that only opens a window for others to take even more sales from you later on. Or you can completely satisfy demand but there will always be excess inventory somewhere in the chain. Every realistic solution is suboptimal somewhere, and every innovation in efficiency or intelligence is replicated so there is no permanent market advantage. Until we get to Star Trek-style replicators, but that eliminates supply chains and retail altogether…
Can you work on the replicators for me? 🙂
Aye, Captain. My name’s “Scott” for a reason!
Not all products are equal regarding precision in planning and fulfillment. Even within a category or assortment, there are SKUs where customers have different expectations about availability. The best retailers understand this concept and focus on high-profile items their customers expect to have at all times while allowing other products to sell out. This is assortment planning 101, blend your item’s costs and inventory to deliver your financial goals and make sure your customers have the things they expect to have on hand and available.
The pandemic buying frenzy exposed some inherent risks associated with extended supply chains and JIT inventory planning. And some retailers knee-jerked and went overboard where maybe it wasn’t warranted. After we get through the holidays I would strongly advocate assortment rationalization, evaluating your product mix not only by performance and margin but also by availability and product role to figure out where to make bets on inventory and where JIT still makes sense given the customer’s demand.
Creating and then managing scarcity can be a great strategy, especially if it’s on-trend. For apparel retailers and other competitive categories like shoes, that probably feels like looking for a unicorn with all of the planning challenges that have come with the pandemic for the last couple of years. Insead of JIT or JIC systems, retailers might consider trying an inventory intelligence solution that uses ML and AI that can process the millions of data points regarding price elasticity and discounting, inventory stock-outs, timeframes, seasons, selling channels or marketplaces, and more.
Compared to approaches like JIT, inventory intelligence is holistic rather than minimalist. It means analyzing all available business data to identify patterns and trends and building out strategies and recommendations based on data-backed insights instead of expecting that conditions in the supply chain and the consumer market will remain stable.
I assume by “more in line” the question meant “more than in 2022,” and as we move further from the pandemic-induced supply problems, it’s reasonable to think things will become more normal (aka “better”). But normal was hardly perfect — matching supply and demand is less science than art even in the best of times — and who knows what new surprises lurk in the future … right Vlad?
Using 2022 data to forecast for the 2023 retail season seems risky. Every recent year has been an outlier. Instead, retailers should prepare for the 2023 holidays by ensuring that their tech stack supports realtime inventory visibility. RFID has become the go-to tech layer that can increase visibility throughout the supply chain and even through the returns logistics process. With RFID tag pricing at affordable levels, it has moved from a nice-to-have to a must-have solution.
For clothing brands, the better sizing feedback they can get—which sizes specific customers actually bought and kept—the better they can gauge orders in the future.
Retailers often fail to incorporate real-time data for making inventory decisions and then end up inaccurately planning their inventory requirements. Buying enough inventory to meet demand without being left with overstock is something that retailers must ensure. However, many retailers dig a route to failure by solely relying on their gut feeling and outdated data insights while making their inventory plans.
Strategies retailers can implement to optimize their inventory levels:
1. Data-driven inventory planning: Decision-making is done based on real-time insights from datasets.
2. Backorders: The strategy serves as an excellent opportunity to encash future inventory. By implementing the backorder strategy retailers can actually ensure increased revenues and lower overhead inventory costs.
3. Pre-Orders: The strategy gives retailers a realistic impression of what sizes, colors, and options must be offered, therefore, retailers order the right quantities of products from vendors.