Inventory Gluts Continue to Burden Supply Chains, Prompting a Deeper Consideration of Demand Forecasting and Distribution Network Capabilities

Both retailers and manufacturers placed big bets on 2022 seeing a strong return of consumer demand with production ramping up accordingly, but global market unrest and inflation forced consumers to tighten their spending. As of 4Q 2022, discrepancy between inventory and sales growth reached 19%, and ordering levels were down 40% Year-over-Year (YoY) in a bid to remedy the previous ramp up, according to the Morgan Stanley Shipper Survey. Excess inventory became the industry’s number one headache, with high storage levels eating into retailers’ bottom lines and a mix of products that didn’t fit with changing demand.

While retail inventory levels have receded from their August 2022 peak by roughly 1.5% as of 1Q 2023, inventory gluts remain. In the United States, storage rates are up 10% YoY according to WarehouseQuote, with some companies even using shipping containers to store excess inventory. This not only indicates a persisting stock problem, but is also adding costs through companies having to pay “per diem” charges to ocean carriers for every excess day the container is away from port. The problem is expected to continue throughout the second and third quarter of the year and is expected to cost U.S.-based shippers tens of millions of dollars.

The National Retail Federation is forecasting that ports will see an 8.8% decline in the number of units managed YoY, with depressed levels seen throughout 2Q 2023 as retailers continue to process inflated inventories. But despite this leading to a moderate fall in shipping rates, inventory issues are holding inflationary pressure across the supply chain as the operational implications rise.

Retail examples include the likes of Kohl’s, which has seen out of control inventory levels contributing to a drop in operating profits of 85% YoY as prices are marked down to move stock. The global toymaker Funko held so much stock that additional warehouse space had to be rented, but unmatched sales led to having to liquidate excess inventory by dumping US$30 million worth of stock in landfill. And Gap Inc. has seen its margins hit significantly following disappointing sales extending from the seasonal period through 2023, with an operational challenge to move stock in order for new seasonal apparel to be brought through.

The same effect is also being seen across other industry verticals. As interest rates have increased, car companies are having to lower prices in order to attract consumers and avoid stock levels increasing even more. And despite a 2-year-strong shortage situation, chipmakers are facing the same pressures from macroeconomic trends, with many trying to clear their now excessive inventory of chips built through ramped up production in a suddenly depressed server and equipment market as tech budgets have been slashed.

If the pressure of over-supply weren’t enough, the challenge of e-commerce returns is something many retailers are contending heavily with. Without being able to efficiently process and redistribute stock moving in reverse, returns are not only adding to the excessive inventory problem, but also introducing additional operational costs that will continue to significantly impact retailers’ margins if not passed down to the consumer. The issue is then only further exacerbated by ongoing labor constraints, with companies scrambling to avoid warehouse employee burnout to avoid making the problem even worse.

Matching supply with demand is an endless endeavor, but creating a supply system that is both agile and calculated in its approach is becoming more achievable with the right tools and placement of distribution nodes. After experiencing both extremes over the last 3 years, many retailers are reimagining how they can better fulfill consumer demand without the need for oversupply.

A recurring theme across the retail sector is the need to embrace sophisticated forecasting tools that take into account historic data and incorporate current Point of Sale (POS) data, market signals, and social media trends. Leading solutions are also delivering Artificial Intelligence (AI) and Machine Learning (ML) capabilities to help better process the various data feeds and continuously improve signals for procurement with an increasing number of companies like RELEX and o9 Solutions offering such capabilities. In conjunction, understanding how demand spikes and external events could impact future supply can be achieved by leveraging digital twin technology from companies like Oracle, IBM, and River Logic, creating an ability to both forecast and assess supply capability.

Another more proactive strategy supported by deeper insights is for retailers to shape the demand, rather than react to it. With stronger forecasts and visibility into the end-to-end supply chain, planners can better allocate inventory, run promotional events, and merchandise stock more effectively to help move stock at a pace that is more aligned with the downstream supply rate.

Omnichannel fulfillment is another strategy being used to improve inventory management, leveraging existing stores and localized facilities to support changing consumer preferences. Solutions like the “endless aisle” are allowing stores to offer the full range of goods available without the need to physically hold the inventory. This service is becoming increasingly accessible as retailers pair with solution providers that are offering store connectivity and automated micro-fulfillment solutions, ultimately removing the need to send high levels of inventory to every location in the network. Such methods are also helping to streamline returns management by removing the need for returned items to be sent all the way back to centralized facilities, as they can be scanned and processed at a localized store level, removing lengthy transits and single points of inventory buildup.