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: 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?