As supply chains and consumer demands continually shift, predicting accurate future inventory needs is crucial. However, achieving precise forecasts is an intricate process that involves data analysis, industry experience, and customer insights. If demand is not properly predicted, companies can end up with too much inventory — a dangerous position for a company to be in.
If a company ties up too much cash in excess inventory, they may be forced to slash prices down the road, chasing a shrinking consumer base being hit hard by inflation.
Faced with these challenges, how can companies avoid overstocking their inventory with so many outside factors affecting the modern supply chain?
Challenges in demand forecasting: lessons from the 2022 inventory glut
To avoid excess inventory and a shortage of cash, it’s crucial that a company collects accurate data. There are several essential data points to consider…
Knowing your current inventory levels, maximum stock levels, and historical trends is crucial — but any black swan event can easily knock you off center.
If you’ve forgotten to account for outstanding purchase orders, they can affect your future inventory as soon as they’re delivered. If you haven’t accurately forecasted seasonal demand because of outdated data from years before, you can end up over-ordering for a holiday season, and be left sitting on a mountain of inventory as soon as it ends.
In 2020, the American supply chain was thrown into chaos after covid-19 hit the scene. As inflation rocked the average consumer, American companies could not fill their orders when the disruption tied up inventory on ships.
In Q2 of 2022, all of that excess inventory hit companies simultaneously. In the wake of that tidal wave of stock, many organizations slashed their prices to reduce the excess.
“Three years ago, our inventory management processes were manual. We were using spreadsheets, but it worked. Then covid-19 hit and the wheels fell off. We are still experiencing the supply chain disruptions caused by it. We now realize we need to move to a more robust solution.”
- Alex Koshulko, Cofounder of GMDH Streamline
For companies offering a diverse range of products, accurate forecasting is particularly crucial. The industries hit hardest by the 2022 inventory tidal wave were manufacturing and wholesale, sectors with many moving parts.
The consequences of overstocking: lessons from a pandemic economy
Before the pandemic struck, two-thirds of supply chain managers relied on Excel as their go-to supply chain management system. The landscape was predictable, allowing for straightforward demand forecasting based on historical data.
However, the pandemic abruptly altered this landscape. Companies suddenly found themselves drowning in excess inventory, just as inflation began to tighten its grip on American consumers.
This surplus inventory came with a hefty price tag, beyond just the cost of goods. Warehousing, increased insurance, and heightened security expenses began to erode profits. Moreover, the excess inventory tied up valuable capital, diverting resources from other essential business operations. As a result, overstocked warehouses introduced a new set of challenges, such as errors in order fulfillment, shipping delays, and a higher risk of products going out of stock.
The longer this excess inventory sits idle, the more likely companies are to resort to forced discounts and sales to move it. While this may clear space, it also comes with its own pitfalls. Forced sales not only shrink profit margins but can also tarnish a brand's perceived value. In the long run, this conditions customers to expect discounts, which weakens brand loyalty. Even worse, products risk becoming obsolete before they even leave the warehouse.
Strategies to prevent overstocking
To avoid the pitfalls of overstocking, businesses are adopting various strategies that not only optimize inventory but also enhance profitability.
Acquire superior tools and services
Several tools and services facilitate real-time data-driven forecasting. Demand forecasting software, customer relationship management (CRM) systems, and point-of-sale (POS) systems can help enhance the accuracy of demand predictions.
During the pandemic, in the midst of the biggest supply chain crisis in modern history, American Eagle acquired two supply chain software companies, AirTerra and Quiet Logistics. Because they didn’t see the solutions they wanted on the marketplace, they invested in and created their own.
They reduced their package miles by two billion, time to deliver to stores by 80%, and cost per package by $1.50. Their profitability doubled when they saw savings of $360 million in freight and markdowns and an 18% jump in productivity.
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Embrace just-in-time (JIT) inventory methods
JIT is a lean inventory strategy aimed at minimizing overstocking. Businesses only order inventory as needed, reducing excess inventory carrying costs. To implement JIT successfully, you'll need reliable suppliers, efficient logistics, and an agile supply chain.
Toyota is one the most well-known JIT success stories. During the pandemic, they realized that raw material cost was one of their biggest inventory challenges. Instead of ordering raw materials weeks or months in advance, they switched to a JIT model, and now only order raw material to their production floor after a customer has placed an order.
Collaborate more effectively with suppliers
Retail giants like Walmart and Procter & Gamble have achieved remarkable results through collaboration. Walmart's Retail Link system allows suppliers to access real-time sales data, enabling them to adjust production to match demand. Meanwhile, Procter & Gamble's "Continuous Replenishment" program integrates supplier inventory systems with their own, fostering a seamless flow of goods.
Additional resources
- 5 ways AI can benefit demand forecasting and inventory planning - An in-depth blog post from Forbes about leveraging AI to generate effective, lean demand forecasting
- It’s a Retail Armageddon - An article from CBS News written during last year’s supply chain crisis that shows the hidden costs of poor inventory management
- PackageX Inventory Management Software - Our cloud-based inventory management and forecasting software that seamlessly integrates with your existing software
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