Why inventory management is so important for retailers

In 2021, 7.4% of retail sales were not realized due to out-of-stock items, which cost retailers $82 billion, per NielsenIQ data.
article cover

Francis Scialabba

· 5 min read

There are three words no shopper wants to hear: “Out of stock.” For retailers, it likely means a missed sale, so no one’s happy.

That’s why inventory management is such a key component of running any retail business.

Retail inventory management is complicated; there’s not a one-size-fits-all solution. But being able to meet consumer demand while simultaneously not leaving too much merchandise on the shelf pays off in the long term.

What does inventory management entail?

Broadly, inventory management involves retailers ensuring they have enough supply to meet consumer demand and are able to deliver products on time, whether in store or online. It’s also vital for retailers to know exactly when they receive items from their suppliers, when to reorder, and how to accurately track products.

Streamlined inventory management that’s organized and well connected wherever a product is stored and sold can boost sales, deliver a better customer experience, and keep budgets and margins in check. It’s about balancing how much retailers have invested in products versus how quickly customers are buying those products, Jonah Ellin, chief product officer at 1010data, told Retail Brew.

Poor inventory management can lead to low or no stock, which in turn can snowball into consumer disloyalty and, ultimately, declining sales.

  • Misjudged inventory decisions like overbuying, buying the wrong products or misallocating inventory account for an estimated 53% of unplanned markdown costs for retailers, according to a 2019 Coresight Research survey, the latest data available.

In 2018, retailers lost out on $300 million in revenue due to poor inventory management, and that was before the pandemic. Pre-pandemic, the odds of shoppers seeing an out-of-stock message were 1 in 200. That figure rose to 1 in 59 in 2022, a 235% increase. In 2021, 7.4% of retail sales were not realized due to OOS items, which cost retailers $82 billion, per NielsenIQ data.

“When something goes out of stock, where do you think people are going to go?” Michael Keenan, freelance commerce writer and contributor at Shopify, told Retail Brew. “[If] you’re just selling a white T-shirt, there’s a lot of other places where people can get a similar white T-shirt.”

Organization and visibility are key

There are a number of retail management solutions that help retailers track their inventory. Such software tools help track what items are popular, what items aren’t as popular, and the financial implications that reduce processing costs and time.

  • Point of sale (POS) inventory management systems help owners remotely track inventory, while closely monitoring sales. This is one component that sets Walmart apart from the rest of the industry. The company has a patented vendor-managed inventory POS model that shows stock visibility and management, and minimizes stock loss.
  • Invia Robotics and Locus Robotics are also top players in inventory management when it comes to number of patents filed and geographic reach, respectively.
Retail news that keeps industry pros in the know

Retail Brew delivers the latest retail industry news and insights surrounding marketing, DTC, and e-commerce to keep leaders and decision-makers up to date.

Inventory management becomes infinitely more complicated when you factor in economic conditions that are out of retailers’ control, such as inflation and supply-chain disruptions. However, Edward Wong, SVP and global retail sector leader at Blue Yonder, told WWD that retailers have gotten better at forecasting, restocking, and inventory management because of new tech.

“The great part about being a retailer right now is that there are so many tools in place that can help you automate and keep your counts accurate,” Keenan said, adding that the key is “leveraging those tools in order to make the best out of a situation, even if there’s a supplier delay, manufacturing holdup, or logistics issue.”

Grocery and CPG pose a unique challenge

The calculus is even more complicated for grocery stores and CPG brands, which have to account for shelf life since they can’t recoup dollars through markdowns or liquidation.

In the aftermath of Amazon purchasing Whole Foods in 2017, its customers saw empty shelves after Amazon implemented a new automated replenishment inventory management system. The new system affected several locations across the country, and Ellin said Amazon misjudged Whole Foods’s capability to integrate the new system into its operations.

For CPG, packaging is an important consideration when it comes to preventing loss on unsold products.

Charles Haverfield, CEO of US Packaging & Wrapping, told Retail Brew that CPG companies should carefully consider the kind of materials they’re using to package their products, given the right decision can extend the shelf life of a product, which is key when managing inventory.

  • Package waste can be a huge cost retailers incur that can be avoided, he added. Companies roughly spend between 10% and 40% of a product’s retail price on the packaging alone.

“If you can maintain the proper inventory and turn it around in the proper amount of time, then you can reduce a lot of waste, you can reduce a lot of excess materials that are ordered—the improper materials that are ordered,” Haverfield said.—KM

Retail news that keeps industry pros in the know

Retail Brew delivers the latest retail industry news and insights surrounding marketing, DTC, and e-commerce to keep leaders and decision-makers up to date.