What is behind retail's $1.1 trillion inventory losses?

tablet inventory room

Retail research house IHL in June estimated an industrywide loss of $1.1 trillion. But IHL is not limiting itself to traditional metrics.

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When retail research house IHL published its report in June on retail inventory losses — which is simply a combination of overstocks and out-of-stocks — it estimated an industrywide loss of $1.1 trillion. The problem is that IHL is not limiting itself to traditional metrics.

For example, IHL President Greg Buzek described a recent incident in which he went to a consumer electronics chain store, prepared to purchase more than $1,000 worth of products. The store inventory showed that the item and the desired accessories were all in stock at that store, but associates spent almost a half-hour searching and couldn't find them. Sale lost by that chain, sale won by Amazon.

"In consumer electronics, one in three customers leaves without buying something that they intended to buy," he said.

Was that necessarily an understock issue? Was the inventory display an error? Were the associates not looking in the right place? Had the product been misplaced by a customer in an aisle where no one would have any reason to look? Is it on the floor in the backroom somewhere? Had it been shoplifted three days ago?

IT would argue that until those questions are answered, until it's been determined what was really going on, one can't attribute it to inventory issues. Buzek counters that any time a sale can't be completed when the systems it should be complete-able, that's an inventory issue.

It's an interesting perspective. All would agree that an inability to make a sale — when both the customer and the associate want the sale at that price to happen — is a big problem. But is labeling it an inventory issue helpful?

IHL throws a lot of different issues into its inventory calculations, including revenue lost due to missed sales and "excess discounts" forced by overstock situations. But the report also factors in losses from rival price matching, "marketing not aligned with merchandising," losses due to inadequate associate training, vendor interactions, food spoilage, empty shelves and shoplifting.

Even shoplifting has two components: visible and invisible. Visible thefts are ones the stores know about. Invisible thefts are ones the store has yet to find. Those are more expensive, as it costs labor looking for a product that it couldn't possibly find. Hence, the longer thefts go undetected, the more money that invisible thefts cost.

The report put the worldwide losses due to overstocks at $471.9 billion and the losses due to out-of-stocks at $634.1 billion.

Some of the problems, Buzek said, are the psychological hesitations that often contaminate forecasts. "Retailers are so concerned with having too much inventory that they don't buy enough," he said. "It's the difference between the inventory system and what the reality of the store is."

But the most serious reality, Buzek said, is that the average retail chain in the IHL survey reported doing full stock counting only once a year — and that the count was typically off by as much as 25%. "They’ve got to do it at least quarterly and ideally monthly. The problem is the cost," he said.

The most obvious response to the counting part of the inventory problem is item-level RFID, something along the lines of what Tesco is investigating.  But item-level RFID thinking is still the exception today. "A lot of people quite frankly have only looked at RFID as a supply chain component and not as an every-item component," Buzek said.

One issue is that the non-counting parts of the inventory problem mostly deal with forecasting — and today's torrent of data points coming from mobile, wearables and e-commerce have the potential to improve forecasting. Retailers get real-time stats about what is being explored and what is being discussed on social media. How many factor that into inventory decisions? Not nearly enough.

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