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Retailers can’t forget to prioritize capacity management despite inventory shortages
Fearing empty shelves during the winter holidays from global supply chain issues and shortages, many retailers have shifted their inventory acquisition strategy with mixed results. Rather than relying on demand forecasts to place orders with suppliers, some retailers instead ordered whatever inventory they could acquire to ensure full shelves with no plan as to when that inventory should come into their warehouses.
In instances when specific seasonal items were available but limited, some retailers ordered as much as the supplier would allow. When this inventory arrived at retailer warehouses, it took up valuable space, leaving little to no room to hold additional in-demand items as they became available. As a result, many products quickly went out of stock at stores.
It’s true that no customer wants to be greeted with empty shelves in a store or encounter the dreaded “out of stock” notice online. But retailers can’t avoid this by simply placing orders without a plan in place for replenishment or capacity management. Without this plan, orders hit warehouses in one big wave rather than through a steady flow, causing significant bottlenecks.
As a result of this short-sighted strategy, some retailers wound up with capacity issues at both the distribution center (DC) and store levels. Stores may have had full shelves, but the shelves weren’t filled with the items that were forecast to sell best. Those shelves, filled with stale inventory, now must be turned over to make room for products related to the next holiday cycle.
Typically in this situation, stores send some overstock back to DCs. But when those DCs are already filled to the brim with inventory, many retailers will need to turn to markdowns to clear shelves. Unfortunately, the attempt to avoid loss of profit from understocks results in shelves being too full and, eventually, that same profit loss.
Even when facing inventory shortages, retailers must plan with capacity management in mind alongside thoughtful ordering. They can accomplish this by carefully reviewing forecasts to ensure they meet demand while also managing available capacity at each stage of the supply chain.
By ensuring a controlled, even flow of goods from warehouses to stores and from suppliers to warehouses, retailers can mitigate the competing issues of overstocks and understocks, allow for room to shift inventory at season’s end and protect margins as much as possible.
Discussion Questions
DISCUSSION QUESTIONS: Are you seeing situations where retailers are failing to prioritize capacity management due to the current supply chain environment? How can retailers best optimize inventories at the store and DC levels given the continuing supply chain disruptions?
Poll
Loading …BrainTrust
Dave Wendland
Vice President, Strategic RelationsHamacher Resource Group
Steve Montgomery
President, b2b Solutions, LLC
Capacity management should always be something a retailer looks at constantly. You can only build so much warehouse before you no longer have the space to expand. Planners can review this weekly in their buyer meetings, and take appropriate actions to ensure that there is an even flow of goods.
Great discussion, Andrew. The supply chain issues facing our country – coupled with labor constraints – are spiraling in the wrong direction. And I fear that many retailers are approaching it with frenetic activity rather than thoughtful strategy.
The analogy I draw compares actions being taken by many retailers today to the rise of computing power. Some retailers are purchasing and hoarding as much as they can by adding warehouse space to store the over-supply of whatever it is they can get their hands on. Why? Because space is relatively cheap and presumed demand for these items will surely follow. Remember when we used to say that computer storage was cheap? Unfortunately, for many, the result was amassed documents, files, and other stored items that simply filled up space and created a nightmare when trying to locate meaningful information.
Filling capacity with all the wrong stuff is not a pathway to optimization.
The supply chain challenges should be urgently forcing retailers to prioritize improving their demand forecasting models. The fact that retailers are throwing demand forecasting modeling out the window during this time exacerbated the issue further. Capacity issues don’t just pertain to the physical store floors and, in today’s omnichannel world, inventory management needs to take capacity at every stop along the item’s lifecycle into account.
Supply chain issues were fairly predictable over a year ago, at least as far as products made in Asia were concerned. Then came port congestion and trucker availability. Now I can’t even get Eggbeaters consistently at the grocery store. The grocery stores I visit are making no attempt to hide or disguise empty shelves. Hoping, maybe, that they will be filled very quickly. Apparel retailers are clearly taking fixtures off the floor and are still sitting with empty shelves. To me this now becomes a case study in Weeks of Supply management, along with management of pricing and promotions. In an environment of high demand and low inventory, a retailer who still has an abundance of unsold seasonal inventory at the end of January is not on their game. This season is an opportunity for a master class on maximizing margins with leaner inventory.
Capacity management, specifically planning and constant review of aged, excess, current, and forecasted inventory. The fact that this is not a priority makes me wonder if the retailer has invested in planning at all. Supply chain disruptions have caused some retailers to put sustainability and reducing over-production and over-buying on the back burner and this will be detrimental to our planet.
The reality is that overstocking and looming markdowns are going to devalue your brand. Retailers should know better. Increase in-season planning and stop reacting to the supply chain chaos. Let’s invest in better digital and predictive tools for planning teams so they can make better data driven decisions.
Buying more doesn’t solve the problem. Buying right is the solution.
Managing demand forecasting and replenishment with capacity is a balancing act. Given the current supply chain disruptions, it is easy to see how retailers could get in a predicament with over-ordering high demand products to help avoid out-of-stocks. Leveraging advanced inventory optimization tools that dynamically balance demand, supply and capacity could help retailers avoid the over-capacity dilemmas.
The solution is and has always been to “flow” the merchandise into DCs and into stores as opposed to taking a drink from a fire hose. This was not done as late as 40 or even 30 years ago. You bought it and shipped it when you could get the production of the factories and then stuffed the stores until it was difficult to walk around the aisles. Retailers today are trying to flow goods into the DCs and stores with stage purchase orders, and with multiple shipments per day or week to the stores. Harder to do but better results.
I take you back to high school physics and Newton’s Third Law: for every action in nature, there is an equal and opposite reaction. Well, we’re living it right now. The current supply chain disruptions are creating havoc with retailers and we’re seeing a whole new set of actions (this is the equal and opposite reaction part) from contracting exclusive container ships to hiring private air fleets to using over the road trucking companies never used before. Buying up huge chunks of inventory in the hopes that these goods will sell is a big gamble. A few retailers will win big, but many will be left with excesses and take a hit on margin.
Having the wrong inventory in your warehouse and stores will not allow you to have the right inventory when it becomes available. Is there a simple solution? No. Any solution for a retailer is going to take constant vigilance and communication with every link in the supply chain. Retailers have to be ready to grab opportunities when they see them and having too much money and space allotted to the wrong merchandise will not allow them to do so.
Almost a year ago, we saw empty shelves at grocery stores due to panic buying in the anticipation of shortages of regular supplies. The current retail scenario of inventory hoarding appears to stem from similar patterns of human behaviors. Organizations are run by humans, so it is natural for them to go into survival mode in the event of a threat. Rather than criticizing this behavior, we should find ways to embrace it.
Moreover, because this is the first holiday season after 2020, it is going to be unlike any other. So no predictive tool can tell what the consumers will buy this year as there is no historical data that takes into account the factors shaping consumer demand today.
So, my suggestion for retailers is to stock a little less inventory than your storage capacity. In other words, evaluate your inventory managing and delivery capabilities to determine the amount of inventory you can store to avoid future markdowns.
Leverage the power of your carefully chosen assortment, surplus human, and other resources as a value-add for customers to shop with you.