Originally published by Quantzig: Retail Inventory Management: 5 Methods to Tackle Surplus Stocks
Retail inventory management has grown increasingly complex as competition intensifies and consumer expectations shift. For retailers, the core challenge is balancing enough stock to meet demand without overstocking, which ties up valuable capital and leads to markdowns. Achieving this balance is essential for long-term growth.
Today, inventory management is a vital element of supply chain strategy rather than just a logistical function. With the rise of omnichannel retail—selling across multiple platforms with flexible delivery and pickup options—optimizing stock levels is more challenging than ever. Retailers are now turning to advanced techniques to avoid overstock, streamline their operations, and boost profitability. Here are five effective strategies to mitigate overstock risk.
Use Tailored Analytics to Improve Inventory Control
Customizable analytics solutions allow retailers to optimize inventory according to specific business needs, reducing surplus stock and increasing overall efficiency. By leveraging analytics, retailers gain real-time insights into inventory trends, enabling better stock control. For businesses seeking specialized inventory optimization, requesting a tailored proposal may be worthwhile to explore how custom solutions can enhance efficiency and support strategic objectives.
Five Key Inventory Management Techniques to Minimize Overstock
1. First-In, First-Out (FIFO)
The First-In, First-Out (FIFO) method prioritizes selling the oldest stock first, keeping inventory fresh and minimizing the risk of outdated products. FIFO is especially useful for perishable goods or items with expiration dates, as it encourages stock rotation, reduces waste, and improves customer satisfaction. This straightforward approach helps retailers increase turnover rates and effectively minimizes excess inventory across various settings.
2. Last-In, First-Out (LIFO)
The Last-In, First-Out (LIFO) technique, which prioritizes selling the most recent inventory first, can be beneficial under certain market conditions, particularly when prices are volatile. By matching the latest inventory costs with current sales revenue, LIFO enables retailers to adjust pricing in line with market trends. During periods of rising prices, LIFO may also help reduce taxable income by valuing stock at the most recent, often higher, costs. Though less commonly used in retail, LIFO offers flexibility in adapting to inflation and pricing fluctuations.
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3. Just-In-Time (JIT) Inventory
The Just-In-Time (JIT) approach focuses on keeping inventory lean by ordering stock only as demand arises. JIT works well for fast-paced retail sectors where products turn over quickly, reducing warehousing costs and the risk of overstock. However, JIT relies on accurate demand forecasting to avoid stockouts and is best suited to businesses with adaptable supply chains and strong vendor relationships. By keeping inventory lean, JIT helps retailers respond efficiently to demand without carrying unnecessary stock.
4. Gross Margin Return on Inventory (GMROI)
Gross Margin Return on Inventory (GMROI) is a critical metric for retailers looking to maximize the profitability of their inventory investments. GMROI calculates the gross profit earned for every dollar spent on inventory, providing a clear view of which products or categories are most profitable. By tracking GMROI, retailers can make informed decisions about pricing, promotions, and reordering, reducing excess stock and boosting profitability. GMROI offers valuable data-driven insights, helping retailers ensure each item supports overall success.
5. Open-To-Buy (OTB) Inventory Planning
Open-To-Buy (OTB) planning is a proactive inventory strategy that sets a purchasing budget based on anticipated demand and current stock levels. OTB helps retailers control purchasing costs, manage cash flow, and avoid over-investing in inventory. This flexible approach also allows adjustments based on seasonal trends, promotions, and shifts in consumer demand, supporting better financial planning and reducing surplus stock. By aligning inventory with actual demand, OTB helps retailers maintain an optimal balance, preserving resources for more dynamic purchasing needs.
Conclusion
Successful inventory management is a mix of strategic planning and the right tools to maintain stock levels without excess. Techniques like FIFO, LIFO, JIT, GMROI, and OTB each bring unique advantages, from promoting faster turnover and cost savings to enhancing customer satisfaction. By implementing these strategies, retailers can adapt more effectively to market demands, streamline operations, and improve profitability. In a competitive retail landscape, these techniques empower businesses to stay lean, agile, and primed for long-term success.
