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A hidden killer of your business

Insights May 26, 2020 Maros Gardon 6 min read

Businesses are losing a lot of money each year due to ineffective inventory management. This leads to overstocking, understocking, or a combination of both. Imbalance in your stock has several negative impacts preventing further growth of your business.

Many companies invest heavily into new fancy marketing automation features, bringing a lot of new traffic and even the desired conversions. However, inventory management lacking real-time tracking, automation, cross-system communication, and data-driven forecasting may easily hinder all your marketing efforts.

Current Situation

According to a study conducted by the IHL Groups, overstocks and out-of-stocks cost retailers $1.1 trillion globally in lost revenue.
This is quite an alarming number. It equals to almost $144 per each person on the planet. The  good news is that with the right solution you can easily prevent such a situation and keep your inventory in a healthy state and your gross profit growing.
Several years ago, when most of the shopping took place in brick-and-mortar stores, inventory management was highly dependent on sales data from preceding months and other factors including seasonality, expected date of salary, and special events such as Christmas, Black Friday, etc.

Nowadays, the situation is much different, almost every major brand is using online retail as an additional or, in some cases, the primary point of sales. Brick-and-mortar stores are serving as dressing rooms, where customers are able to try the product, but the final conversion usually happens in the online store. New technologies using augmented reality, may  soon move another segment of shoppers to the online stores. This will make the whole situation even more complex.
While brick-and-mortar stores are accessible mostly to local people or people within a certain radius, online stores are open to almost anyone in the world, therefore it may be quite difficult to rely on seasonality or day of salary when ordering your stock.
Among all the inconveniences caused by improper stock management, there are two main situations negatively impacting your business. The first one in overstocking.

Too Much Stock?

For example, multinational Swedish fashion-retail H&M has $4.3 billion in unsold clothing.
This excess inventory causes higher operating expenses such as increased warehousing cost. Not to mention that having too much cash imprisoned in inventory may cause problems to your cash flow and lead to lost investment opportunities by simply not holding sufficient (liquid) capital.

What is more important, your gross profit will suffer – to sell these items, you usually need to significantly reduce the price, in some cases, below the actual cost of the unsold goods (negative gross profit). This means that your margins are being eaten up.
In an extreme situation, you may not be able to sell the goods at all. This usually happens when you are selling merchandise prone to technological or moral obsolescence.

Overstocking is slowing down your inventory turnover time, and space which could be used to house attractive and high-demand products is stocked up by products nobody wants.

Inventory management strategies like Just-in-Time, when businesses do not manufacture or order products before a customer places an order, may help prevent overstocking. However, this approach requires a high level of coordination between the company and its suppliers and a considerable investment in the IT infrastructure.  

This approach is highly dependent on suppliers and any unexpected problem with delivery or sudden demand for certain products poses a serious risk for your business. And again, the margins may fall short because businesses are losing discounts associated with ordering goods in higher quantities.  

Not Enough Stock?   

Understocking is the exact opposite situation, the demand exceeds the supply. You are simply not able to accurately predict what amount of goods should be stocked in order to meet the demand. This can lead to a different set of problems such as lost sales opportunities, decrease in customer loyalty, or even churn.

Both of these scenarios are the result of several factors such as poor inventory management, bad decision making caused by inaccurate or incorrect data. In many cases, companies are not able to ensure effective cross-functional cooperation and communication across multiple systems.
Effective inventory management is an art requiring a combination of skills as in management, data analytics, forecasting and some fortune-telling. To deliver the best results, all these capabilities should be possessed by a single person, a person who is not making mistakes and is able to keep 100 percent focus on all his/her tasks.

This “person” is called “a single inventory management system” and is able to handle all the main pain points associated with the inventory lifecycle.
There are several areas where the single inventory management system should be able to fully take over.

Inventory Analytics & Advisory

If you are familiar with data management platform, inventory analytics supplies the same functionality from the inventory perspective. Accurate tracking and analysis of stock data enable your category manager to make decisions based on real-time data.
The insights for your category manager should include product impressions, revenue/profit per visit, etc. However, the capabilities should not end up here, the system should be able to advise you on critical inventory indicators comprising reorder points and quantity, safety stock level, and estimated time to sell out. With all this data, the category manager will be able to order the right amount of goods at the right time.

Price Optimization

Dynamic pricing is a quite handy feature which can help you to avoid overstocking and understocking at the same time. The system automatically adjusts the price of your inventory which is not selling as expected. This speeds up the sell-out process and ensures frictionless inventory turnover.

On the other side, if the system detects that the demand for some of your products is exceeding the actual supply, it temporarily increases the price of the product to prevent out-of-stock while you are waiting for new supplies.

Integration With Your Marketing Platform

The power of the inventory management system if connected with online marketing platform dwells in the fact that unlike other systems, the inventory management platform holds all financial data on your merchandise – selling price(revenue) and cost.
This information gives you a really powerful advantage when designing your marketing campaigns.

Example 1

Let’s take for example product recommendations which are getting better and better with new features such as visual or contextual recommendations, and there is no doubt about their effectiveness. Now imagine a situation when, in addition to the above features, you are able to recommend products based on your profit margins. This means that you can now recommend the best fit for your customers with the best margin to maximize your profit.

Example 2

Another example may be combining price optimization with product recommendations to avoid over/understocking. In practice, this system should enable you to decrease/increase the price of certain products and recommend/not recommend them to customers based on their availability.

Other marketing channels can benefit from inventory management in the same way. Marketing automation software enabling you to connect inventory management with your online campaigns will ensure seamless day-to-day operations of your business.
A properly implemented inventory management system can help you have a full control of your stock and minimize unnecessary costs by keeping your inventory at a healthy balance.  

The market is full of inventory management solutions, but you need to do your homework when choosing the right inventory management solution for you. If the system cannot bring you the majority of the above benefits, then it may be just another cost with no future benefits and revenue.

Would you like to know how Exponea can help you to manage your inventory and optimize your campaigns? Check our Inventory Management product description.

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MISSGUIDED Victoria Beckham Desigual
ebuyer Agent Provocateur River Island

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