The basics of retail are often summarized as having the right product at the right place, and at the right price. Seems simple enough, right? Multiply that by thousands of products that each come in different colors and sizes. Then, add in the complexity of hundreds or thousands of stores. After that, layer in the effects of seasons, trends, lead times, safety stock, limited selling and storage space, and so many more factors that affect the business of retail. It’s not so hard to see how such a simple concept can be incredibly complex to effectively bring to life.
What are overstocks?
Overstocks, also known as excess stock or excess inventory, are products in inventory that exceed consumer demand. While it’s important to ensure that you don’t run out of the items your customers want, it’s also critically important to avoid filling valuable shelf and rack space with products nobody wants.
Why are overstocks so important?
Overstocks are responsible for more than 3 percent in lost revenue for the average retailer. That’s nearly as much as out-of-stocks, which amount to just over 4 percent in lost revenue. In North America, the loss from overstocks is estimated to cost retailers $123.4 billion! The financial impact of carrying, shipping, and discounting excess inventory is significant. For seasonal or perishable products, the negative impact is even greater, since they need to be moved before their time is up.
How do overstocks impact the customer experience?
As shoppers, we have all experienced the disappointment of researching and shopping for an item, only to find that it’s unavailable in our size, or in the store closest to us. The impact of out-of-stocks may be more direct than overstocks, but, make no mistake, overstocks are still an important inhibitor of a superb customer experience. When last season’s castoffs are cluttering the racks, the browsing and shopping experience is far less enjoyable. What’s more, unwanted inventory steals valuable space from the products that customers really want! Plus, retailers need to budget for end-of-season markdowns, which inevitably gets calculated in the cost of the products for which inventory accurately meets demand.
How can retailers prevent overstocks?
Preventing overstocks is all about meeting (and not exceeding) demand. In today’s fast-paced, complex, and demanding world, retailers need to equip themselves with intelligent tools to proactively plan according to demand.
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Demand Forecasting
Excel just doesn’t cut it anymore. Achieve perfect balance between consumer demand and stock availability by employing sophisticated modeling algorithms to generate a forecast that’s based on true demand history. You don’t even have to decide which forecasting algorithm will be the most accurate: a smart demand forecasting tool will tell you which method is the most accurate based on historical and current demand. Promotional lift impact, as well as periods of insufficient stock and associated lost sales, must also be factored into calculations for the ideal forecast that will prevent overstocks before they happen.
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Planning
As the business of retail becomes increasingly complex and retailers grow to operate in broader geographies, it’s important to adapt assortments to meet local demand. Clustering customers and/or locations based on dimensions including customer purchasing behavior, demographics, and store space is a smart way to plan for demand. Clustering can be used to more accurately target assortments and promotions to the right consumers driving improved customer service and revenues and enabling retailers to prevent costly overstocks.
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Allocation and Replenishment
Taking current stock, inbound stock and need into account, a sophisticated allocation solution is key to maximize selling potential and avoid local overstocks. Stock can be pre-allocated to increase warehouse efficiency by enabling the cross-dock of stock on arrival. Additionally, configurable allocation rules allow for managing different phases of the product lifecycle including new products, ongoing and pushing out stock for end-of-life products. Similarly, demand-driven replenishment is a key strategy you can use to achieve the perfect order and maintain your targeted service levels on your ever-important “bread and butter” stock.
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Pricing
What’s the perfect price? It’s an art and a science to find the price that will generate the most revenue with volume and margin. Price the product too high, and overstocks can happen. Price it too low, and you’re missing out on potential profits. A smart price and markdown planning solution is a key tool in the modern retailer’s toolkit for preventing markdowns and growing the business.
