Understanding the Importance of Inventory Management
Originally published: July 8, 2019
Updated: August 30, 2023
The importance of inventory management has never been lost on retail business owners. However, a Coresight Research report released in 2019 puts a dollar figure on how costly inventory mismanagement can be: $300 billion in 2018 alone. So, either there isn’t enough focus being put on it, or retailers need to work on their management skills and possibly invest in technology that can help them.
The report, based on a survey of more than 200 retail companies, determined that by discounting merchandise, U.S. retailers leave billions on the table every year and that money could be saved if better inventory decisions had been made. Estimates show that only about 60% of their merchandise sells at full price.
The Coresight survey also showed that 53% of respondents said overbuying and buying the wrong products were the top reasons that led to price markdowns.
Another study by Wakefield Research and Bossa Nova Robotics shows that 73% of retail professionals say that inaccurate forecasting is a consistent issue at their stores. Other key findings include:
- 66% say inaccurate pricing is a constant problem.
- 65% struggle with inventory tracking.
- 87% think inaccurate inventory is a larger contributor to revenue loss than theft.
These numbers demonstrate the importance of inventory management and how it can make or break a retail business.
This year, worldwide retail sales are projected to surpass $30.3 trillion, which is up 4.5% over 2022. However, retailers still face uncertainty that they’ll get top dollar for their products.
According to professional services provider, Deloitte, only about one-third of retail executives have confidence in their ability to maintain or improve profit margins. Inflation is the key factor in that uncertainty in 2023, but other factors – changing technology and consumer behavior – also play a role.
Out of stock means stores are out of luck
Out-of-stock notifications or empty store shelves became pretty common during the pandemic. Prior to 2020, the odds of shoppers seeing an out-of-stock message were one in 200. That increased to one in 59 by 2022, a 235% increase.
A NielsenIQ data study showed that in 2021, over 7% of sales were not realized due to out-of-stock items.
“Customers won’t tolerate outs,” says Dan Nesmith, president and founder of Paladin Data Corporation, a leading provider of retail technology. “That’s the retailer’s problem, not the consumer’s. If a store doesn’t have what a shopper is looking for, they not only lose that sale, but they also lose sales on every item on that shopper’s list.”
Markdowns Don’t Discriminate
It doesn’t matter how merchandise is sold, online or in stores, retail businesses often struggle to get the prices they want for their products. While only about half of all nongrocery retailers sold the majority of their products at full price, less than a third of multi-channel retailers managed to get top dollar.
The factors leading to these discounted sales are slightly different for online retailers. The hypercompetitive online retail market, where the largest beasts in e-commerce routinely match or undercut price quotes of competitors, is the biggest problem for most businesses. Direct-to-consumer brands, custom retailers, off-brands, shopping events like Prime Day, Black Friday and Cyber Monday, along with the sheer number of options available to shoppers also lead to price chopping.
The New Retail World
It’s pretty obvious that retail today is not what it was even five years ago. The amount of information – data collected through a variety of sources including sales transactions – available to retailers today is staggering.
So, having the means to mine it, manage it, and put it to work is critical for businesses of all kinds. Retail business owners might know they have inventory management issues, but they might not know they have the data and the tools available to fix them. Gathering the right data is the first step in dealing with inventory mismanagement. Modern retail platforms, which start with a sophisticated point-of-sale system that touches all aspects of a business, are the tools business owners use to mine and manage their data and inventory.
Automated order management helps store owners order the right number of products during the right times of the year to satisfy customer demand.
Ross Martin, owner of Caledonia Village Ace Hardware, uses Suggested Order™, a feature in his Paladin inventory management system, to help him place accurate and efficient orders. He says it has allowed his store to keep an in-stock percentage of 97% to 98%, which Ross says helped him earn Ace Pinnacle status as a top-performing store more than once.
“Our store uses Suggested Ordering 100%. Ace considers 95% really good and we’re always above that,” he says.
Common Missed Steps
Poor performance measurements, industry experts agree, are the leading cause of inventory management mistakes. Not having accurate inventory data or a way to gather it leads to outs and overstock.
An item could move quickly off your shelves but be a poor investment, while another item could have a poor margin or anemic sales but still be a great investment. Gross margin return on investment (GMROI) provides a true picture of an inventory item’s investment performance.
“One of the most devastating factors against GMROI is overstock. Overstock kills a store’s gross margin return on investment,” Nesmith says. “GMROI on overstock is zero. Stock depth should be enough to meet expected demand for two to four order cycles and nothing more.”
An inability to meet customer demands is another telltale sign a business doesn’t grasp the importance of inventory management. If the in-demand items aren’t on the shelves, customer service declines, which is promptly followed by sales.
Automated inventory management software does a better job of tracking inventory in real-time and forecasting consumer demand than people.
Lack of planning is the result of not being able to forecast demand for products. A BRP study, ”Keeping Customers Happy,” shows that for 63% of shoppers, it only takes one unsatisfactory experience for them to stop shopping at a store. Not having the correct items on the shelf is at the heart of that experience.
The core function of a retail platform is to streamline operations and make businesses more profitable. To do that, they utilize sophisticated algorithms that analyze sales data and automate processes like inventory management which allows retailers to properly forecast customer and product demand.
Putting Data to Work
A few years ago, Sam Olson, with help from his parents purchased Buffalo Hardware in Buffalo, South Dakota. Fresh out of Black Hills State University, one of Sam’s first tasks was to find a retail management system that would give him the data he needed to turn the old store around.
The previous owner had operated the store with a cash register, pen and paper. After studying between “10 and 15” business platforms, he found one that he thought he could build his business upon. Buffalo Hardware’s sales tripled in Sam’s first year as owner and in 2019 the store notched over $2 million in sales.
That business success led to another and another and another. He now has four businesses with all but one running on the same retail platform.
“My goal was to make sure we had a system that would take us into the future. We had to have the technology to help us succeed. You don’t change systems every year, so we made sure we made the right decision. Paladin just gives us the data we need,” he explains. “It was just a natural fit for me being able to use Paladin to sell these products. The data you get from it is so clean, easy to get to, and easy to use. It has improved our processes in preparing quotes and filling orders.”
Although it is probably one of the least glamorous parts of running a retail business, understanding the importance of inventory management and using it to stock the right products at the right times and sell them for the right prices is the correct formula for success.
“You have to let technology work for you rather than you working for it,” Nesmith says. “Allow technology’s use of sophisticated forecasting models to automatically tailor your inventory to meet your customers’ expectations.”