Why Inventory Distortion Costs Retailers Trillions

inventory disruption

Inventory distortion due to out-of-stocks and overstocks is projected to cost retailers $1.77 trillion worldwide this year, according to a report from IHL Group.

When customers come ready to buy but don’t end up making a purchase because they can’t find an item, those out-of-stocks account for $1.2 trillion in losses. On the flip side, overstocks that ultimately lead to excessive discounts or spoilage will cost retailers $562 billion in 2023.

There’s no denying that the last few years have been especially challenging for retailers, navigating unpredictable supply-chain disruptions, inflation, and overall shifts in demand. The good news is that inventory distortion losses are down $172 billion from 2022, a signal that some improvements have been made. A very expensive problem, however, still remains.

What causes inventory distortion in 2023?

Supplier issues continue to be the main driver of out-of-stocks and overstocks, responsible for $418 billion of the inventory distortion problem.

Theft, by both employees and consumers, is the second biggest source of inventory issues, accounting for $379 billion in total losses. Consumer theft costs nearly $203 billion, while employees steal about $175 billion globally.

Personnel issues, such as a lack of employee training or trust in systems, contribute another $291 billion. Other problems with internal processes cost $239.1 billion, and bad data systems amount to $173.4 billion.

On a positive note, losses due to spoilage and lockdown issues have dramatically decreased over the last three years. Although this category is still responsible for $67.4 billion in losses, that figure is a massive improvement compared to the nearly $570 billion lost in 2020 and $238 billion lost in 2022.

“While governments opening and China abandoning the zero COVID policy was the lion share of the progress, we must give credit to better forecasting and systems like fresh item management for reducing a portion of this as well,” noted IHL Group in the report.

How can retailers reduce inventory-related losses?

Of course, technology is the first solution that comes to mind. More specifically, AI designed to forecast demand and streamline supply chains. And while there has been significant buzz about how generative AI can help, IHL Group reports that traditional AI/machine learning has had the greatest impact on curbing inventory distortion thus far.

For context, traditional AI analyzes data to detect patterns and make predictions, while generative AI goes one step further to create new data, patterns, and other outputs based on what it’s learned. Although its impact has been minimal so far, generative AI is expected to make AI-driven inventory management systems even better as the technology becomes more advanced.

In fact, IHL group predicts that retailers will be able to improve their gross margins by 25% or more from today’s level by 2029, if they are able to take advantage of the powerful combination of generative AI and traditional machine learning.

While technology is an essential tool to improve inventory management, though, it is not the entire solution. According to IHL Group, “retailers must also focus on improving supplier relationships, training personnel, and implementing effective loss prevention measures as well as lobbying governments.”

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