There are a number of things that can cause an inflationary economy. Financial writer Emma Kerr (@emmarkerr) explains, “Inflation is caused by factors like pressures on the supply or demand side of the economy, money supply policies and even consumer expectations.”[1] She adds, “Economists define inflation as the rate of increase in prices over a given period of time. It is typically a general measure referring to the overall increase in prices or cost of living in a country.” Michael Rosen, chief investment officer at Angeles Investment Advisors, told Kerr, “The price of any particular good going up or down is not inflation. Inflation is caused by the supply-demand imbalance of money, not the supply and demand imbalance of a particular good, like the cost of an airplane ticket or the price at the pump.” However you define inflation, the world has entered an inflationary period. And, for months, experts have been saying that inflation won’t ease until demand for products decreases.

The irony of excess inventory

One way of describing inflation is having too many dollars pursuing too few products. In the grocery sector, for example, correspondents from the New York Times observe, “[Grocery shoppers] doing their weekly runs to grocery stores [are finding] some items that used to be plentiful have been missing for months.”[2] It’s ironic, therefore, in this inflationary period, that many retailers are experiencing the exact opposite problem — too few consumers seeking items they already have on hand. Tech writer Chris Stokel-Walker (@stokel) explains, “Retailers bamboozled by the pandemic now find themselves staring at mountains of unwanted stock.”[3] He continues, “The past two years have been blighted by supply shortages — with just-in-time retailers struggling to ship their goods, electronics manufacturers staring down a shortage of computer chips, and supermarkets struggling to fill their shelves. Now, some retailers are struggling with the opposite problem: a deluge of stuff nobody wants to buy.”

For consumers with a little spare cash, there are bargains to be found — even during this inflationary period. Reporters from Bloomberg explain, “A nationwide inventory glut has led to unexpected bargains for U.S. shoppers, especially for goods that used to be hot sellers during the pandemic. The discounts stand out as Americans grapple with a 40-year high in inflation, which has raised prices from the gas pump to the grocery store. The likes of Walmart Inc., Target Corp. and Gap Inc. have slashed prices on non-essential items they stocked up on but shoppers are no longer clamoring for. Lower demand for big-ticket items contributed to U.S. retail sales posting their first drop in five months.”[4] Journalist Rachel Wolfe (@rachelbwolfe) reports big discounts on some items are likely to start showing up around Independence Day.[5] She writes, “Deep discounts are expected on oversize couches, appliances and patio furniture that are more expensive for companies to store in their warehouses, analysts say.”

Of course, good news for consumers is bad news for retailers. Journalist Sarah Nassauer (@SarahNassauer) explains, “Big retailers benefited over the past two years from the pandemic rush to buy patio furniture, laptops and home décor, as shoppers were buoyed by savings and government stimulus checks. Now many of those same stores are grappling with a swift reversal of buying behavior, with consumers spending less on goods in favor of services and necessities such as food and fuel.”[6] According Stokel-Walker, Bloomberg reports, “The biggest retailers in the United States have nearly $45 billion in excess stock.” Many of those goods, he writes, were products intended to be sold during year’s holiday shopping season; however, they didn’t arrive in time.

Excess inventory was also caused by the Bullwhip Effect. Lisa Ellram, a professor of supply chain management at Miami University, Ohio, told Stokel-Walker, “Issues across the supply chain have been exacerbated by phantom demand. When faced with long lead times for basic items, people will often over-order. Someone might put deposits down on sofas with three retailers and see which one arrives first, then cancel the other two orders.” As a result, she notes, “Manufacturers were getting fake signals of what the true demand was.” Nassauer notes that retailers who successfully sell excess inventory at steeply discounted prices could still come out winners — if they are able to restock their shelves “with more in-demand inventory later in the year while competitors are still working through excess items.”

Optimizing inventory

Stung by inflation and the change in consumer behavior, retailers have to wondering what products will be in-demand later in the year. Even if the right products are determined and stocked, retailers still face the challenge of maintaining proper inventory levels. As Stokel-Walker explains, “The speedy way to untangle the mess would be to break the cycle of feast and famine — but that’s easier said than done. The economy is a mess, consumer spending is unpredictable, and the war in Ukraine continues to roil.” He adds, “The problem is particularly acute for bigger companies because of the way they buy. Smaller retailers order less stock more often on shorter lead times. But the sheer number of items larger retailers sell means their orders with manufacturers are made further in advance, forcing them to predict demand based on less reliable information.”

Although the data may be less reliable than in the past, thanks to rapidly changing conditions and consumer behavior, data analytics still offer the best hope for improved inventory management. Saurabh Singh (@SaurabhSingh), Director and Chairperson at Appinventiv, reports, “In the last 12 months, retailers have recorded losses of over $1.75 trillion because of mismanaged inventory.”[7] Any reduction in those numbers is a big plus. As you might expect from a purveyor of inventory management software, Singh believes such software can help mitigate some of the deleterious effects of poor inventory management. He suggests ten ways companies can benefit from the use of inventory management software. They are:

1) Improved inventory tracking (when inventory management software is integrated with ERP).
2) More accurate reordering.
3) Reduced stock overselling.
4) Reduced business costs.
5) Improved supply chain operations.
6) Easier access to new selling channels.
7) Automated inventory management.
8) Better seasonal forecasting.
9) Improved warehouse management.
10) Increased productivity.

Analysts from Consultancy.eu note, “A growing number of supply chain organizations are embracing prescriptive analytics — the most mature form of analytics — as a means to optimize their inventory management.”[8] This type of advanced analytics is generally embedded in a cognitive technology (aka artificial intelligence) solution, like the Enterra Global Insights and Decision Superiority System™, powered by the Enterra Autonomous Decision Science™ platform. The Consultancy.eu analysts conclude, “Adopting data-driven insights can be a gamechanger for inventory management. Using data, companies can come to the optimal trade-off between the often different interests of key stakeholders, such as sales, finance, manufacturing and supply chain. This is where data analytics come in, providing both the oversight as well as the details to take the best decisions, with speed.”

Concluding Thoughts

Although a silver bullet solution for inventory optimization might not yet exist, it’s clear new approaches need to be tried. Analysts from Logility explain, “For most businesses, the past two years have been a much-needed teaching moment on the state of their inventory planning, tracking, and management capabilities. Decades-old, tried-and-true rules — such as unit-based policies for safety stock, ABC classifications, and inventory planning based on spreadsheets — are far too static, unreliable, and slow for today’s world. … As marketplaces grow more complex and supply variabilities increase, staying competitive requires making the right trade-offs and working with an accurate view of the end-to-end supply chain.”[9] Like the analysts from Consultancy.eu, they conclude, “Access to predictive analytics and artificial intelligence makes product production, placement, and delivery more strategic, timely, and impactful.”

Footnotes
[1] Emma Kerr, “What Causes Inflation?” U.S. News & World Report, 26 April 2022.
[2] Maria Cramer, Christine Hauser and Livia Albeck-Ripka, “Facing Higher Grocery Prices, Shoppers Change Habits,” The New York Times, 15 May 2022.
[3] Chris Stokel-Walker, “The World Has Too Much Stuff,” Wired, 14 June 2022.
[4] Bloomberg, “U.S. Retailers Plan Big Discounts as Inflation, Inventory Add Up,” SupplyChainBrain, 16 June 2022.
[5] Rachel Wolfe, “Stores Have Too Much Stuff. Here’s Where They’re Slashing Prices.” The Wall Street Journal, 14 June 2022.
[6] Sarah Nassauer, “Target Warns Profit to Drop Due to High Inventory Levels,” The Wall Street Journal, 7 June 2022.
[7] Saurabh Singh, “10 Reasons Your Business Needs an Inventory Management Software,” Appinventiv Blog, 22 March 2022.
[8] Staff, “Maturing supply chain analytics for optimal inventory management,” Consultancy.eu, 19 July 2021.
[9] Staff, “Is It Time for a Better Approach to Inventory Optimization?” Logility Blog, 10 May 2022.