Overstocks Matter Too

GROCERY RETAILERS ARE TALKING about the latest report from IHL Group, “Retailers and the Ghost Economy – $1.75 Trillion Reasons to be Afraid.”

That mind-boggling number refers to the cumulative global impact of Out-Of-Stocks, Overstocks and Returns across the retail spectrum. IHL coined the term “Inventory Distortion” in 2011 to describe the combination of OOS and Overstocks. In North America alone, those figures add up to $253 billion, the current report says.

The Out-Of-Stock side of Inventory Distortion comes up often as a significant problem for retailers, but the Overstock dimension hasn’t received its due attention. Maybe this is because it’s easy to understand OOS in terms of lost sales, while the economic impact of excess stock levels may be harder to quantify.Overstocks tie up precious capital in excess inventory, but one of the biggest cost factors is labor.

To illustrate, consider the time required to keep the salad dressing aisle ready-for-business. An inventory manager receives product from the current shipment and takes it to the floor, with the remainder going to back-stock. In a busy store, this process might repeat before the next shipment arrives. All told, a product might be re-handled multiple times before a customer puts it into the cart. Limiting touches to just one (truck-to-shelf) keeps labor at a minimum.

Another significant cost and implication of overstock is shrink. In grocery, 75% of the Overstock costs result from perishable spoilage and discounts, amounting to 2.4% of retail sales, IHL reported in its 2012 study. For all items, where there is significantly less back-stock, the chance for damage is much lower. Where product is fresher, spoilage and discounts are significantly reduced.

Itasca Retail brings unique, practical solutions to issues highlighted in the IHL report. We have seen first-hand how retailers, mostly in the grocery space, have worked diligently to solve the interrelated problems of OOS and Overstocks only to be frustrated – until they implemented our Inventory Optimization solution.

IHL states that 84.9% of the Inventory Distortion problem In North America is addressable with improvements in technology, processes, and training. Our own empirical data, accrued from more than a decade of in-market experience with customers, supports this.

Itasca Magic™ provides an up-to-the-minute actual financial and unit-based calculation of overstock. It maintains a real-time perpetual inventory, knows what is on-order and en-route and, by simply subtracting the forecast, a retailer can always know its overstock position and act to alleviate it. With Itasca, retailers are thinking forward to zero-book value of inventory – something unheard of until recently.

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