Inventory shortage isn’t a challenge anymore: inventory glut is!
Inventory glut or excess inventory is currently one of the most significant hurdles to the supply chain's return to normalcy. Overloaded warehouse inventories are an expensive strain, leading to consumption in companies' bottom lines. Industry experts are predicting that the excess supply and accompanying storage expenses are expected to continue through 2024 or further. Rewind to 2020, demand was endless and supply chain leaders were struggling to match the supply vs demand equation. From the Suez Canal crisis to the shortage of global chipsets, numerous supply chain disruptions continued to make headlines everywhere. Coming back to 2023, the industry can see the stark aftereffects of that excess demand. With growth slowing down to normalcy, retailers and suppliers are now bloated with excess stock, with most of it falling under the outdated component category. Three ago those products were in high demand but with the passage of time and the continuous evolution in the tech landscape, tech components become old fashioned easily. Companies are now faced with the challenge of disposing these items by either selling them off at lower prices or scrapping them or utilizing them in alternate products. Companies frequently order their product supply months before it hits the shelves. However, since the pandemic, forecasting demand has grown even more challenging. Some mass retailers' stock values fell over the same period as they disclosed overstocks and projected cutbacks, while suboptimal assortment concerns also impacted the market value of some fashion companies. The tech industry can feel the real weight of the volatile market bloated with overstocked inventory. According to a 2023 Kearney study report, excess inventory alone has resulted in a $250+ billion issue in the United States alone. As per census data, excess inventory in the United States amounts to trillions of dollars on a global scale.
Inventory glut – root causes
Inventory glut is not something new and can occur at any part of the supply chain due to multiple reasons. Let us take a look at some of the most common causes.
Overestimation of demand - One of the most common causes of inventory gluts is overestimating customer demand. Companies may anticipate higher demand for their products than what materializes, leading to excess inventory.
Seasonal variations - Businesses that deal with seasonal products may order excessive inventory to meet peak demand but then later face the struggle to sell it in the off-season.
Poor demand forecasting - Poor sales and demand forecasts or a lack of visibility into market trends may lead to excess inventory pile up. This is common when companies fail to adapt to changing customer preferences or market conditions.
Product obsolescence - When products become outdated due to new technology or trends, companies may be left with unsellable inventory.
Supply chain complexities - Numerous challenges within the supply chain, such as delays in receiving goods or raw materials, can lead to companies ordering more inventory than necessary to avoid potential shortages.
Price volatility - Special promotions or discounts can cause brief increases in demand, forcing retailers to over-order and resulting in surplus inventory when the promotion expires.
Error in lead time calculation – Long lead times creates delay of information between supply chain partners. This lag makes it difficult for suppliers to effectively estimate demand and make educated decisions about inventory and production levels.
Poor inventory management - Overstock issues can be exacerbated by poor inventory management methods such as faulty record-keeping, insufficient demand planning, and improper supply chain coordination.
How ‘Inventory Momentum’ helped in controlling inventory gluts
Industry leaders started applying the concept of ‘inventory momentum’ which means a large inventory is not an issue. ‘Inventory Momentum’ is a forward-looking indicator based on the basic momentum equation: current inventory x rate of inventory change. Here are the key actions that changed the course of the situation.
Delaying incoming materials - Instead of placing advance orders, companies started ordering those required to manufacture finished goods in the future. Orders for components that would not be required immediately in manufacturing were postponed by procurement teams.
Setting correct planning parameters - Spending in real-time technologies gave stakeholders visibility into the amount of inventory they had across all records. This data enables to simulate inventory level fluctuations while planning characteristics like as lead time, safety stock levels, and minimum order quantities.
Alternate options for obsolete products - Companies collaborated with suppliers and distributors to locate alternate clients for disposing stranded components.
Prioritizing client revenues - Companies maximized client’s revenues by constructing the mix of items where components were already on hand by prioritizing clients with a backlog of significant orders.
Collaborating with clients - Companies tried collaborating with customers to arrange for working capital advances. Customers could reduce their use of extra components by changing product lifecycles or collaborating with suppliers to develop alternate applications.
International certifications like CIWIM, CIPM, CISCP, CISCM, offer real-time advanced insights that are critical for making informed supply chain decisions related to appropriate buy depths, allocation adjustments, and in-season planning, helping you to expand your inventory levels and income.