What is Overstocking and Understocking in Retail?
Overstocking
Overstocking happens when retailers have more inventory than they can sell. This means that they have extra products in their stores or warehouses that they can’t sell. This can be very costly because they have to pay to store and maintain these extra products
Understocking
Understocking happens when retailers don’t have enough products to meet customer demand. This means that customers might not be able to buy the products they want because the store doesn’t have them. This can be very frustrating for customers and can lead to them going to other stores or buying online instead.
In 2018, before the pandemic, poor inventory management cost retailers $300 million in lost sales.
In 2021, not having enough items in stock cost retailers $82 billion in lost sales. This happened a lot more during the pandemic – the chances of seeing “out of stock” went up by 235%.
Traditional Inventory Management Methods
- Traditional inventory management often relies on manual methods like:
- Keeping cards or spreadsheets to track inventory levels
- Doing physical counts of inventory periodically (monthly, quarterly, or annually)
- Using basic forecasting to try to predict how much to order
- These manual methods can be time-consuming and prone to human errors. They also don’t provide real-time visibility into inventory levels.
Challenges of Traditional Inventory Management
- It’s hard for stores to balance how much to order – they can easily order too much or too little. Mistakes like this account for over half of the unexpected discounts stores have to give.
- Keeping track of inventory is complicated, with stores needing to balance supply, demand, and cash flow. Outdated systems and inefficient operations can lead to inventory problems.
The Impact of Overstock and Understock on Profitability
Overstock Impacts
- Increased costs for storing, maintaining, and insuring excess inventory
- Having to sell overstocked items at big discounts
- Not being able to use that money for other important business needs
Understock Impacts
- Losing sales when popular items are out of stock
- Damaging the store’s reputation if customers can’t find what they want
- Having to pay extra to rush in replacement inventory
Finding the Balance
The key is to find the right amount of inventory – not too much, not too little. This requires good forecasting, efficient inventory systems, and closely monitoring stock levels. Getting the balance right helps maximize profitability.
AI in Inventory Management
Key AI Technologies in Inventory Management
- Machine Learning: Algorithms that learn from historical data to help us make better decisions about what to stock and when.
- Predictive Analytics: AI-powered models that combine data from multiple sources to help us anticipate what our customers will want and need.
- Real-Time Data Processing: AI systems that provide us with a real-time view of our inventory levels and sales trends, so we can stay on top of things.
- Automation: AI-driven automation of routine tasks, like ordering new stock, so we can focus on more important things.
Benefits of AI in Inventory Management
- Better Decisions: AI helps us make more informed decisions about what to stock and when, so we can avoid overstocking or understocking.
- Cost Savings: By optimizing our inventory levels and streamlining our operations, AI can help us save money.
- Happy Customers: By ensuring that our products are always in stock and available, AI helps us keep our customers happy and loyal.
- Flexibility: AI-powered inventory management lets us adapt quickly to changes in the market and customer preferences.