How Advanced Analytics Can Put an End to the $50 Billion Retail Overstock Problem
Retailers are empowered by AI and ML technology-driven analytics to optimize inventory and eliminate the $50 billion overstock crisis.
Some retailers are facing backlash over images showing piles of unsold inventory that have been burnt or destroyed. This overstock issue 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 disclosed that they had $4.3 billion in overstock — an amount that is hard to picture and even harder to deal with.
Far from simply a financial issue, overstock is devastating the environment. Raw materials are destroyed, and a huge amount of energy is consumed when producing and moving products across the world. Not to mention the hours of people’s labor, blood and sweat that is poured into each product, only to have them destroyed with no purpose.
It’s a frustrating problem, given that it’s so easy to solve. Those who embrace modern technology are already optimizing their inventory with advanced analytics, entirely preventing these massive amounts of overstock.
So, if a retailer is wondering why consumers and investors are pulling away, it’s because they are still using a traditional approach in a modern world.
How do retailers get 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 can’t afford to risk losing sales because they ran out of stock.
The consequences of out-of-stocks are severe, from losing profits to losing customers and inevitably market share. The direct and indirect damages of lost sales are so great that retailers prefer to markdown unsold inventory, or even get rid of it at cost.
Retailers face the challenge of figuring out what the product mix should be, and how much of each product to purchase. On top of that timing is key, as bringing product in too late risks missing potential sales, but too early means incurring carrying costs and tying up cash flow. These variables, along with pricing and vendor lead times, make planning demand very difficult.
Understandably retailers will purchase additional stock to offset the dynamic nature of the retail industry. Unfortunately, many are over-correcting and bringing in substantially more inventory than they can sell.
Related: The 4 Essential Elements Inventory
But why burn the inventory?
With growing scrutiny from consumers and added pressure from lawmakers, why would a respected retailer like Burberry still choose to destroy £28.6 million in unsold clothes and accessories?
The answer is complicated, but let’s touch on some of the reasons:
Poor demand forecasting - The primary reason retailers find themselves in this no-win situation is a lack of effective planning from the start. It’s reasonable to add buffer stock to prevent lost sales, but some retailers are bringing in unreasonably more inventory than they could ever possibly need.
Brand image - Luxury brands like those owned by Richemont (Cartier, Piaget and IWC) create value through exclusivity. This means they can’t mark down their products without devaluing the brand. As a result, Richemont has admitted to destroying $563 million worth 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.
Reselling - Unsold inventory is often sold at markdown prices by third-party resellers. This can be an excellent solution, but when too much product is accessible to the public, they stop shopping at retail prices. Retailers have to be careful not to suffocate their own demand.
Recycling - Why is inventory being destroyed instead of recycled? Not all plastics and textiles can be recycled. The majority of goods are made up of mixed materials both recyclable and not. National Geographic reported that only 9% of plastics are recycled, and less than 15% of textiles according to the EPA.
Simply too much overstock - There are plenty of organizations that accept and distribute donations locally and internationally. Unfortunately, while donating may seem like a perfect solution, large-scale donations can bring more harm than good. The massive amounts of exported inventory have suppressed local markets, so much so, that in 2016 the East African Community (EAC) voted to completely ban imported clothing.
The truth is, retailers find themselves stuck between a rock and a hard place. Retailers need to know that making their shareholders happy without becoming the capitalist villain is possible.
Why should retailers be paying attention?
The world has changed and time is running out for retailers to adjust the way they do business. Shifts in consumer behavior and digital innovations are causing previously beneficial business practices to be harmful to communities and retailers alike.
80% of shoppers across 29 countries believe sustainability is important to them, with the majority willing to pay more for environmentally responsible brands.
Meanwhile, digital transformation has introduced industry innovations like advanced analytics, which optimized the way business is done. Retailers who adopt these new practices save time and money, resulting in stealing market share from traditional retailers.
We know this doesn't have to be the case. Leading retailers are already using technology to pinpoint and solve the root cause of their inventory problems. By leveraging advanced analytics, these retailers have been able to optimize inventory so that they can 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 insights for decision-makers to rely on.
Retailers are easily able to account for all the factors outlined above when forecasting demand. This empowers businesses to bring the right amount of inventory, in the right product mix and at the ideal time.
Perhaps traditional 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, accurate and scalable workflow that is less prone to human error.
So not only are early adopters of this technology saving millions of dollars, but they are positively impacting the environment and communities around the world.
Related article: How AI Is Changing Corporate Decision Making
Retailers, it’s time to adapt.
What is truly surprising is that this technology has been around for over a decade. It has been tested, proven successful and even noted as the future of retail by institutions. Yet many retailers are choosing to stick to destructive, profit bleeding and outdated processes. Either way, it’s only a matter of time before the old guard is washed away by the tsunami that is the digital transformation.
Entrepreneur Leadership Network Contributor