Strategies to manage aging inventory in retail
There are few things more damaging to a retailer than aging inventory. For seasonal items, the clock starts ticking as soon as the order is placed.
The challenge: to sell it all before – and only just before – demand runs out.
It is common to err on the side of caution; ordering excess stock to ensure adequate supply. However too much ‘dead’ stock at the end of the season is a common result of this behaviour. Even when orders are placed using the best possible forecasts, unexpected events or changes in sentiment can leave supply chains stuck with aging inventory. This is not good for business. Money is tied up in products that get increasingly difficult and costly to sell. Every markdown or repricing costs margin and staff time.
To deal with this problem today, companies need to address the problem at its source.
Trapped Capital
When a company’s capital is tied up in stock it can’t be used for anything else. It can’t be used to fund growth, buy hot, trendy stock, or invest in vital infrastructure. Following from this, the amount of time that capital is tied up in stock should be reduced as much as possible. A shorter Cash-to-Cash cycle is an obvious advantage, as this reduces total inventory and releases capital for other projects.
A typical retailer will place orders six months in advance of the receipt of goods, and payment is typically staggered over the production period. If we assume that the first payment is due 60 days after an order is placed, and the second payment upon arrival of the shipment, 180 days after ordering, then this means the retailer has paid for half of the stock 120 days in advance. This equates to an average of 60 days in advance, across the entire shipment.
Next, imagine that this stock ‘sells out’ after 330 days, on average. This assumes that some stores sell out within the first few weeks and that the last remaining items are stuck at stores for over a year before they are discounted and sold at outlet stores years later. As a result, the store can expect its cash to be tied up for 240 days – this is a typical but unnecessarily long Cash-to-Cash cycle.
In contrast to this, a retailer can instead make an agreement with a local supplier who can replenish in smaller batches, more frequently.
This makes it possible to leverage a response time of just 15 days. By using a Dynamic Buffer Management system they can fully sell the stock within 30 days. If the supplier is happy to accept payment terms of 40 days, then a Cash-to-Cash cycle of -10 days (yes, minus ten) is achievable. This dramatically reduces stock risk and maximizes the flow of cash into the supply chain.
What are the consequences of not catering to consumer demand?
If supply chains continue to operate by forcing arbitrary quantities of products to consumers who have shown little interest in them, they will undermine their own profitability and effectiveness. Supply chains must operate by catering to consumer demand or suffer the consequences.
These consequences become very clear when buyer behaviours abruptly change. Without following demand, stockrooms remain full of unsold stock. As a result, there is no space available for items that will sell – nor the cash to pay for ordering them. As proportionally more of the capital becomes stuck in aging stock, slow stock turns are an inevitable result – the return on investment looks worse each day.
This tactic is a very risky one. Sectors like fashion are particularly volatile and sensitive to fast-moving trends. With the inability to readily invest cash in new stock, a retailer is in the worst possible position. The solution is to reduce the investment in inventory.
When stock is supplied in smaller quantities at more frequent intervals, the result is a much faster Cash-to-Cash cycle, and more capital available for growth. When it isn’t invested in a year’s worth of stock, the capital can be used for other things instead. A healthier cash flow makes it easier to borrow too, opening the possibility for new retail locations, technological innovations, or product ranges. Alternatively, the availability of cash generated from profitable sales can be directly used as the funding source itself. This reduces reliance on banks or other lenders altogether.
It is critical that retailers only buy what they will sell. It sounds like such an elementary principle – yet this is ignored every day by many of the largest retailers.
Shortening lead times helps with more precisely catering to consumer demand. A better picture of demand can be obtained much closer to the moment of sale, and new trends can make it onto shop floors much faster – while they’re still in hot demand.
When shortening lead times is difficult, another approach is to leverage postponement – this is already a vital part of agile production techniques. A close working relationship with the manufacturer is needed for this, as they may still need to partially invest in materials or manufacturing of modular components. Postponement, however, enables retailers to more accurately gauge demand over the course of a season, and either up- or down-regulate production of subsequent batches.
What happens when you can respond to consumer demand?
The consumer will be delighted that the items they want are in-stock, and that they don’t need to ‘dig through’ racks of aging stock to reach them. This alone has a positive effect on the business.
In addition to this, the retailer gains a much higher return-on-investment. Instead of capital being invested in stock that has an 80-90% chance of selling over a year, capital is invested only in items that sell. This means that your ROI is as close to the theoretical maximum as possible, with more cash flowing through the entire supply chain.
Businesses operating with the old model are exposed to serious financial risk. They are making an investment in inventory by trying to guess the overall consumption over the entire season. This is doomed to fail by some greater or lesser degree, and so they need to retain a financial buffer to account for this. This further erodes the ROI, as this capital is never invested at all – it just sits there. This practice leaves the business weighed down, and it becomes less agile as a result. Unable to invest in new products, the retailer misses out on potential sales.
Maximize the assortment
A rich assortment that caters for every need is a feature of a healthy retail operation. With a complete assortment, you make the most of the opportunity to cross- and up-sell. It is like having all the ingredients for a recipe – it’s a prerequisite for making a meal. Without every ingredient for their needs, a customer may decide to shop elsewhere. This behaviour is reinforced by online and omnichannel sales, where a single shipping charge or pickup location is desired.
With a complete assortment, you’re more able to move that sticky, aging inventory too. A common feature of dead stock is that it has become isolated from complementary purchases that would otherwise fuel sales. By providing a comprehensive offering, the retailer gives every single item a better chance of selling. The question is not so much about which items to stock, but how often to replenish, and how much each time.
The advantages of eliminating aging inventory
Of course, it may get to a point when an SKU stops selling altogether, or that it sells at a rate that is too low to justify reordering. At this stage in an item’s lifecycle, it has likely been replaced by a better model, new style, or an alternative lifestyle trend that has rendered it obsolete. These products have stopped being a contribution to your assortment and should be replaced by an alternative offering.
There are strong advantages for businesses that actively identify aging stock and take steps to eliminate it from inventory. When cash is no longer trapped in these products it can be made available to invest in newer designs and alternative products or used to fund expansion into new markets. When a company adopts methods that constantly monitor sales velocity and automatically flag underperforming products, it gains a greater level of agility too. This overview gives a company the ability to promote products that are ‘slowing down’ and to reduce reorder sizes dynamically. By becoming more agile, the company can take actions when they have the most impact.
The customers will be happy too, because they will be provided with an assortment that they don’t need to ‘dig through’ to find what they want.
By responding to consumer demand, companies can create a profitable portfolio of products that generate the best possible ROI – after all, retail is essentially an investment business. Generating the highest yield from your portfolio is the goal.
With the expert guidance of Retailisation’s consultancy service, companies are empowered with tactics that help to dissolve barriers to progress and implement new working-methods that keep all teams aligned on the common goal. Interested in learning how we can help? Let’s talk about what is possible for your company.