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We’ve spoken of shifts in consumer sentiment and spending habits as a pandemic- and post-pandemic phenomenon, but it’s clear they are no longer just trends: these changes are here to stay.
Retailers are facing the pressure as inflation has decreased consumer spend while heightened interest rates have made capital more expensive than it has been in quite some time. Geopolitical tensions further exacerbate concerns as the Suez and Panama Canals, two of the world's major supply chain channels, are operating well under capacity due to Houthi Red Sea attacks and severe drought.
Given the uncertainty, retail executives are forced to reassess how to best deploy capital to maximize return—and inventory management is front and center. While many retailers have improved their inventory position since the pandemic, our analysis shows others have a long way to go.
Looking at average inventory across ~120 global retailers, inventory-conscious segments like fast fashion and off-price have seen inventory levels as a percentage of revenue return to healthier pre-pandemic levels. This recovery is due to their relentless focus on speed and inventory turnover, almost constantly generating trend-right supply to meet demand.
Specialty apparel and footwear, however, continue to hold elevated inventory levels compared to pre-pandemic. Most companies in these segments have largely implemented stop-gap solutions to mitigate overstock—such as markdowns or one-time write-offs—rather than fundamentally rethinking their inventory models and incorporating tactics from the more inventory-conscious segments.
Cracking the inventory dilemma boils down to taking practical, strategic actions that solve immediate issues of overstocked, aged, or trapped inventory while also future-proofing to prevent recurring problems. We see six tactics retailers should embrace—three to “fix now” and three to “fix next.”
Fix now:
1. Stand up the right inventory analytics and put someone in charge of monitoring
Taking a page from wholesalers, retailers can leverage business intelligence dashboards to gain an end-to-end view of items across supply chains—both total quantities and where along the chain they sit. Equally important is that someone has direct accountability for the inventory situation.
Savvy retailers should also establish a reporting cadence to review aged and slow-moving inventory to uncover issues and determine how to remedy without turning first to margin-erosive markdowns. Making this process a part of monthly business reviews will proactively identify problems before they stress margins; buyers and merchandise planners will want to have such conversations weekly. Simple policies for aged inventory—e.g. “anything older than 15 months goes to clearance”—can streamline these decisions.
2. Refine the product assortment—keep it simple
Analyzing productivity, sell-through rates, and profitability by SKU will allow retailers to simplify their product ranges. Those that fine-tune offerings will more effectively drive SKU productivity, reduce slow-moving lines, and decrease the need for markdowns.
In addition, demand management must become an ongoing process—as opposed to a seasonal forecasting exercise—through increased S&OP cadences, consistent trend analyses, and regular merchandising plan adjustments. Retailers can leverage data-driven tools, such as our Digital-First Workbench, to get a sense of consumer demand levels to iterate. AI advances can help as well.
3. Improve the returns process
Returns will always be a part of the retail experience, but that doesn’t mean retailers can’t better understand root causes to reduce frequency. Large-scale database platforms, such as Palantir, can help create an end-to-end picture of typically fragmented product-performance return trends across categories and suppliers, allowing retailers to shift processes more efficiently. Those that utilize this information to create action plans will not only reduce returns, but also reduce the share of returned inventory that ends up marked down or damaged and written off.
Fix next:
1. Embrace real-time retail
Retailers should learn from key fast fashion players that have mastered the art of “hyper-fast” fashion, meeting demand with minimal lead times. Inditex, for example, continues to raise the bar by employing savvy design teams that develop “production-ready” styles that their multi-national manufacturing network can quickly produce.
For retailers to more effectively embrace real-time retail, operations teams must utilize nearshoring or onshoring for a portion of manufacturing to meet short lead times. By creating the right balance between these options and more cost-effective manufacturing tactics, retailers can better mitigate inventory risks while maintaining margins.
2. Invest in the right partner relationships to reduce exposure
Many retailers already use more sophisticated inventory ownership methods like dropship or hold-and-ship models, where the retailer does not own the inventory until the customer buys it, minimizing capital outlay and risk. Those that have strong, strategic relationships with brands or manufacturers should further leverage these partnerships to minimize inventory risk, such as by shifting more items to a dropship or hold-and-ship model or negotiating smaller manufacturing quantities and more frequent delivery flows, particularly for core items.
3. Optimize inventory at scale with AI
Retailers are increasingly implementing AI-driven forecasting and replenishment (F&R) solutions, which can optimize inventory across channels and markets using predetermined rules and logic while better predicting forward demand—thus preventing excess inventory. Operating models must progress with AI solutions, which may require organizations to upskill their data science and tech product management teams with new analytics capabilities that maximize value through dynamic tuning.
Retailers that already have a modern F&R solution need to discern whether further enhancements could provide more value, particularly if operating models have not progressed in parallel. Common mistakes include standardizing solutions across categories or styles and neglecting inventory segmentation techniques to tweak safety stock or shelf-fill rules by location, which can lead to allocation overstock and understock issues.
Beyond F&R, retailers can utilize AI to enable digital product creation, virtual sampling sessions, and scenario modeling to reduce lead times. Retailers should also look to customer-facing AI capabilities like automated in-stock alerts that let customers register and receive a notification when an item is back in stock or nearly sold out to drive consumer demand and sell-through.
Adjusting to the post-pandemic new normal requires tactical and practical solutions for retailers aiming to improve their inventory position and ensure capital is invested with the highest potential for strong margin returns. Those that most effectively employ analytics capabilities, leverage partner relationships, and optimize return processes can stem the tide in the short-term. For long-term success, they’ll need to proactively lean into industry trends around real-time retail, utilize the latest AI technology, and standardize product development and manufacturing processes for efficiency.
In essence, laggards must learn from industry-conscious segment leaders and make data-informed decisions. The blueprint to decrease inventory levels from bloated pandemic figures is clear, and the time to start is now.
