Retail Must Align on Inventory Accuracy or Risk Losses, Study Says
The retail and consumer goods industries continue to face inventory-related headwinds on a global scale. In fact, retail is hemorrhaging $1.73 trillion annually due to the cost of out-of-stocks and overstocks (known as inventory distortion), per recent data from analyst firm IHL Group.
Despite $172 billion in inventory improvements over the past year from AI-enabled updates, there's still a widening performance gap between retailers that embrace the technology and those that continue to rely on more traditional, manually intensive strategies.
Inventory distortion now represents 6.5% of global retail sales, down from previous years but equivalent to South Korea's entire GDP, IHL reports.
"We're witnessing a fundamental transformation in how successful retailers manage inventory," Greg Buzek, president of IHL Group, said in a statement. "The data shows a clear bifurcation emerging: retailers deploying AI and machine learning are achieving sales growth 2.3 times higher and profit growth 2.5 times higher than competitors. It's becoming an existential issue — evolve or get left behind."
Leaning on Tech Optimizations
Retailers that do embrace AI-led innovation have realized that "better ground truth is everything" and that lacking it is an existential threat to their survival, Buzek told CGT.
The types of technologies driving transformation include RFID, which is expected to grow 91% over the next two years. Additionally, computer vision and image recognition adoption will increase by 8,143%.
AI and machine learning alone are expected to provide positive results for 76% of retailers through optimizations in demand planning and forecasting. For example, grocers can no longer simply stock shelves with a different flavor of ice cream to fill up space if there's not enough strawberry.
"This change has led to massive improvements in accuracy," he said. "We know of stories of significant double-digit growth in margins due to this compliance alone."
Gaining trust from the consumer that a store has in stock what it says it does is crucial, he said. As channels have expanded, inventory accuracy has become all the more important as "all margins can be erased by associates having to search for inventory that the 'system' says is there for the order."
Bridging the Gap
Without wide tech adoption, however, the industry will continue to struggle. Fewer than one-fourth of retailers have successfully rolled out AI and ML in areas that are hit hardest by inventory distortion, per the study.
Specialty hard goods, in particular, have been historically challenged. They face the highest overall inventory distortion costs. This is because it's a segment with a wide variety of merchandise, lack of standardization, limited supply chain and a high rate of theft, according to Buzek.
"Think auto parts, home improvement, electronics repair … all of these have much longer supply chains than perishable items," he said. "In grocery, we talk about the challenges of the number of apples or onions and getting to the right SKUs. That’s nothing compared to hardware or auto parts, where there are hundreds of SKUs in the same company for the same-named part."
Ongoing Challenges
- Organized retail crime and theft jumped to $379 billion globally.
- Despite tech advancements, inventory accuracy remains compromised by shrinkage at store, warehouse and supply chain levels.
- Supply chain disruption accounts for $301 billion in annual losses — the largest single contributor to global inventory distortion.
- Personnel issues contribute $248 billion globally to distortion losses.
One area of opportunity lies with creating more trusting and transparent partnerships between consumer goods companies and retailers when it comes to inventory planning and marketing and promotions strategies, said Buzek.
Right now, IHL data shows that some of the partnerships are very adversarial, with each side thinking about their own performance and selling data to each other. Instead, he suggested that both sides come together on a single, ground truth about what is truly in stock to ensure compliance on order fulfillment.
The core metric is on-shelf availability so that consumers can believe what retailers have in store and vendors can rely on data to supply what they need, when they need it, Buzek said.F
"A key enhancement here is the space planning compliance and computer-aided ordering moving to vendor-managed inventory," he said.
If these companies are not focused on the customer experience at the end of it all, they have already lost, Buzek added. CPGs and retailers need to move away from "who gets the best margin, who owns the customer," and instead become obsessively focused on the consumer.
For best results, this symbiotic approach should be paired with systematic data management capabilities and integrated technology platforms.
"The future belongs to retailers who view clean, integrated real-time inventory visibility as table stakes," Buzek said. "But simply having visibility isn't enough — you need scenario planning capabilities and the organizational discipline to act on the insights."
This article was originally published on P2PI, a CGT sister brand.
