Retail Safety Stock – Do You Even Need It?


“Determining appropriate inventory levels is one of the most important and most challenging tasks faced by operations managers. If you carry too much inventory, you tie up money in working capital; if you don’t carry enough inventory, you face stockouts.”Crack the Code: Understanding Safety Stock and Mastering Its Equations, MIT

Overstocks and out-of-stocks. A double-edged sword.

If your store runs out of product when unexpected demand hits the fence, it’s a missed opportunity. On the other hand, a store stocked with too much product almost always leads to markdowns and profit loss—another missed opportunity.

This is how the typical song and dance between planning for inventory safety stocks goes. Traditionally, retailers try to anticipate fluctuations in future demand, yet, most of the time, fail to do so accurately.

Given the recent pressures across the industry to improve performance as margins shrink and store foot traffic falls—retailers are scrambling to improve sell-through rates, decrease markdowns, and increase profit. Which is challenging when you’re constantly making the wrong bets in the wrong places.

The art of finding this balance between making sure you have the right inventory on hand is HARD.

In fact, it’s one of the biggest challenges retailers face today, and, in the most simplistic terms—it’s having the right product, at the right place, at the right time.

Bet you haven’t heard that before, have you? :P

While this concern is blatantly obvious to anyone in the retail industry, solving the issue is a whole other ballgame. It really boils down to managing your inventory most effectively.

I know, easier said than done.

Yet, retailers continue to lose billions of dollars annually due to inventory management decisions. I kid you not. In North America alone, the opportunities missed are outrageous:

  • $123 billion loss in annual revenue from overstocks
  • $129 billion loss in annual revenue from out-of-stocks
  • $238 billion sales lost due to product unavailability (yikes!)

These losses hurt big time, especially given the current retail climate. On the flipside, more and more retailers are finally making adjustments necessary to improve these losses. The opportunity for improving inventory decisions across your store locations is invaluable—and completely feasible given the technology and data available. 

Before: Historical Sales & a Rules-Based Approach

So, the question is this: do retailers really even need safety stock?

Retailers know the answer is complicated, to say the least. Traditionally, the challenges behind safety stock rely heavily on past sales and gut instinct to determine the optimal inventory. In addition, as new order fulfillment challenges mount, retailers depend heavily on traditional order management systems' rules-based approaches to make the "best" use of extra safety stock across stores. 

“Safety stock simply is inventory that is carried to prevent stockouts. Stockouts stem from factors such as fluctuating customer demand, forecast inaccuracy, and variability in lead times for raw materials or manufacturing. Some operations managers use gut feelings or hunches to set safety stock levels, while others base them on a portion of cycle stock level […]. While easy to execute, such techniques generally result in poor performance.Crack the Code: Understanding Safety Stock and Mastering Its Equations, MIT

The fact of the matter is this: leveraging historical sales don’t always paint an accurate picture of future demand.

We're at a point in time where retailers have more than enough data on hand than they can handle — which makes the optimization task extremely overwhelming and prone to error. This is especially true with all the data siloed across outdated legacy systems, paired with unproductive rules-based analyses. 

The repercussions amplify when brick-and-mortar retailers rely on a traditional OMS to execute newer online fulfillment models (ship-from-store, BOPIS, etc.) —which is critical to success as they defend their reason for existing in an Amazon-dominated industry.

It's a “one size fits all” attitude (which is insane considering the number of SKUs and store locations retailers deal with). As a result, retailers might get the right amount of inventory for some items, while too much or too little for other items. 

How can retailers move away from this rigid, rules-based approach, where meeting multiple, competing goals isn’t possible? How can retailers leverage all the data available to accurately anticipate future demand and provide the optimal mix of inventory?

After: Demand Prediction & Optimization

The good news?

The amount of data on hand and innovative technology available makes it possible for retailers to overcome this pressing problem. Advanced analytics tools are leveraged by top retailers across the country to overcome the unreliable insights and analysis routinely used – all while increasing speed, accuracy, and revenue. It’s less about having “safety stock” and more about having the right stock.

This means making sure your inventory assortment is optimal, making sure you’re allocating it to the right stores, and making sure you’re fulfilling the right inventory from the best location.

How is this possible?

The key is finding a solution that can:

  1. Move away from a rules-based approach to optimization – aka, the ability to optimize across multiple objectives at once (and in real-time!)
  2. Provide an accurate prediction of future demand based on multiple sources and vast amounts of data 

As channels for purchase become more accessible and the lines between the digital and physical continue to blur, leveraging the inventory on hand is imperative. Not to mention, making sure you’re excelling against the competition when it comes delivering convenience and having the right product available when a purchase moment arises.

Incorporating advanced analytics technology is revolutionizing retail in unimaginable ways to ultimately help overcome these challenges: 

"Today's AI and advanced machine learning techniques are pushing boundaries by allowing marketers and merchandisers to move past the traditional, more manual and rule-based approaches to analysis.”- Gartner's 2017 Hype Cycle for Retail Technologies

By utilizing the technology available (like advanced analytics) to effectively make better investments, retailers can ensure they make the best use of their inventory and confidently increase the right bets in the right areas.

Watch the Replay - Ship From Store Webcast: How to optimize with predictive analytics

Topics: e-commerce, inventory optimization, order delivery, safety stock, fulfillment optimization

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