Retail Supply Chains

Around this time in 2022, retail inventories reached their peak. For well over a year, players in the industry have been working to bring inventory levels back in line with demand — often sacrificing profit in the short term.

In the second quarter of 2023, many retailers and brands saw their efforts bear fruit. Inventories for many — though not all — were down. Margins were up. And the combination of leaner stocks and faster supply chains allowed supply chain managers to chase trending categories through their purchasing practices.

All of that, retailers hope, means the most profitable sales possible in a lackluster demand environment. As retailers head deeper into the third quarter, here is a look at how a selection of retailers and brands measured up against each other on key operating metrics in Q2.

Walmart

What executives said: John Rainey, CFO: “The team continued to do a good job managing inventory, and we ended the quarter down 5%, including an 8% decline in Walmart U.S. We feel good about the progress we've made on in-stock levels as [the] supply chain is normalized and the composition of our inventory mix is improved. We're maintaining discipline in how we're buying general merchandise during this uncertain macro environment to mitigate future risk if demand softens.”

Target

What executives said: John Mulligan, COO: “This quarter's better-than-expected profitability was a testament to [employees’] agility and resilience as they successfully managed through multiple challenges. And while the team deserves credit for this performance, they got an assist from this year's leaner inventory position which offered more room to maneuver than a year ago when the team was dealing with excess inventory. This year, with uncluttered facilities, a renewed focus on retail fundamentals and our continued work to enhance efficiency, the team delivered an impressive increase in profitability in the face of a challenging top line.”

Kohl's

What executives said: Tom Kingsbury, CEO: “As we implement new planning and allocation processes, we're becoming more responsive to the customer's demand, operating with additional open-to-buy to chase trends and minimize risk, maintaining better in stock levels in core basics, and improving inventory flow from our distribution centers to the selling floor. Looking to the fall season, we feel good about our current inventory levels and our ability to continue to manage inventory with discipline.”

Macy's

What executives said: Jeff Gennette, CEO: “Ultimately, we ended the second quarter with inventories down 10% to last year and down 18% to 2019. We were disciplined with our approach to inventory commitments and flexed the cadence and depth of promotions and markdowns, utilizing our data-driven tools to reduce the length of seasonal clearance activity by several weeks. Promotional sell-throughs were better than expected and clearance markdowns were not as deep. Thanks to our cross-functional teams for being nimble, flexible and embracing new ways of working.

“Entering the third quarter, store floors and online are less cluttered and easier to navigate. Content is fresh and seasonally appropriate with open-to-buy and the ability to chase into areas of strength, all of which improves the omnichannel shopping experience.”

Dollar General

What executives said: Jeff Owen, CEO: “We are strategically accelerating the rightsizing of our inventory position by expanding promotional markdowns, primarily in our non-consumable products. While we expect this to result in an operating profit headwind of approximately $95 million in the back half of the year, we believe it will drive traffic and also more quickly reduce excess inventory. We believe this rightsizing supports our operating priority of enhancing our position as a low-cost operator and that it will accelerate improvement in a number of areas, including store and supply chain efficiencies as well as shrink, damages and cash flow.”

Dollar Tree

What executives said: Jeff Davis, CFO: “While inventory was below last year's level, it is elevated due to early receipt of imports. With a rapid recovery across our supply chain, seasonal imports from Asia arrived well ahead of our scheduled third quarter receipts. Moving forward, we will continue to manage our inventory and related trade accounts payable to improve free cash flow generation.”

Under Armour

What executives said: David Bergman, CFO: “I just would kind of remind us that our inventory is in a very healthy position. We don't have a lot of older products that's making up our inventory and we are normalizing against leaner days last year. So I think we're balancing the promotions and the need to move some of our inventory very well and also kind of keeping that third-party off-price liquidation channel in that 3% to 4% range of revenue, which we feel is a reasonable level.”

Nike

What executives said: Matt Friend, CFO: “Looking at inventory, we continue to feel very good about our position. Nike inventory dollars are down 10% versus the prior year. Our total inventory units across the marketplace, including Nike and our wholesale partners, are down double digits versus the prior year.

“Partner-owned inventory units are in line with the previous year, with levels planned to remain lean through our second quarter, a meaningful accomplishment after higher levels of wholesale sell-in during fiscal '23. On the whole, we are very comfortable with the level of inventory in the marketplace in relation to the retail sales that we're seeing as we begin increasing levels of wholesale sell-in in our second half.”

Lululemon Athletica

What executives said: Meghan Frank, CFO: “I would say we’ve made some significant progress. We still have some degree of elevated airfreight in our inventory balance on a cost basis. So, I would say not completely optimized, and turns are a little bit slower than history, and our goal over the longer term would [be] to get those inventory turns back to normalized historical rates. So still some opportunity, but I think the team has done a nice job in navigating what was a really dynamic supply chain and positioning inventory so that we were able to capitalize on the demand upside that we saw and experienced.”

Abercrombie & Fitch

What executives said: Scott Lipesky, CFO and COO: “The supply chain is in a good place with freight costs, shipping times and performance significantly better than last year. With a functioning supply chain, we can once again run the business the way we would like, leveraging chase to read and react and drive inventory receipts. Our inventory for the quarter was down 30% to last year, and both brands and all regions are leveraging our chase capabilities.

“We continue to expect to finish the third quarter with inventories lower than last year. At year-end, we expect to be flat to down to last year.”

American Eagle Outfitters

What executives said: Mike Mathias, CFO: “Compared to last year, gross profit dollars increased $83 million or 22% to $453 million with a gross margin rate up 680 basis points to 37.7%. The majority of the improvement was driven by better merchandise margins. Inventory discipline drove lower markdowns as we maintain our focus on healthy promotions. Additionally, we lapped $25 million of freight headwinds and $30 million of incremental markdowns related to end-of-season sell-offs last year.”

Gap Inc.

What executives said: Katrina O’Connell, CFO: “Ending inventories declined 29% in second quarter versus last year. This includes a 9 percentage point decline related to in-transit as we lap the prior year supply chain challenges and 6 points of decline related to releasing the majority of our pack and hold inventory balance. The remaining 14-point decline was driven by more efficient inventory management.

“As you know, we made significant progress on reducing inventories as we exited fiscal 2022. We remain focused in fiscal 2023 on moderating buys and utilizing our responsive levers. As a result, we are planning for year-over-year inventory to be down generally in line with year-to-date trends at the end of third quarter.”

In October, Dollar General parted ways with CEO Jeff Owen and brought back Todd Vasos to the chief executive role. Vasos led the company as chief for more than seven years until retiring late 2022, with Owen — a decades-long veteran of the company — heading operations under him as COO beginning in 2019.

Several analysts pointed out that the move was made to stabilize the company and reassure investors after multiple quarters of operational shortfalls.

Among other issues, Dollar General experienced a surge in inventory during Owen’s tenure, even as many others in retail regained control of their stock levels.

After Q2, Owen signaled that Dollar General would face a $95 million hit to operating profits from markdowns as the retailer worked to quickly clear inventory, mainly in non-consumable categories. That came after inventory levels rose 8.6% YoY in Q2 and by more than 20% in Q1.

That is a rough performance for a company widely seen as a savvy operator selling low-priced products at a time when consumers are looking for relief from inflation.

Opportunity in out-of-stocks

It’s not just excess inventory the company has been wrestling with. Dollar General has also been working to improve out-of-stocks, especially in consumables, throughout 2023. The capacity issues have indirectly cost the company more in labor for the company’s stores, which is set to increase by $50 million.

“At the store level, what's important is stability in the supply chain,” Owen said in August when asked by an analyst about the increased spending on retail labor. “And when you have stability in the supply chain, that leads to stability inside the store.” He also acknowledged the company’s supply chain has been challenged in recent years.

On the same earnings call, Owen also said that in-stocks had returned to levels had returned to levels seen prior to capacity issues that plagued the company in 2022.

But according to analysts with J.P. Morgan, the incoming CEO thinks there is room for improvement.

“Vasos sees the primary execution issue across stores today tied to a lack of consistent in-stocks leaving sales on the table,” the analysts, led by Matthew Boss, said in an emailed note based on a conversation the J.P. Morgan team had with the returning CEO.

Vasos also told the analysts that Dollar General’s in-stock levels were currently worse than the second half of 2022, and that 90% of out-of-stocks were mainly in core domestic goods that had lead times of only two to four weeks.

Along with adding labor to stores, Dollar General has made several efforts of late to bolster its supply chain and add capacity, among them: opening new distribution centers, including its first dual-use facility that includes its fresh products and an automated distribution center; expanding its private trucking fleet; and the company also recently promoted Rod West into an EVP role overseeing Dollar General’s supply chain.

Trying to tame inventory shrink

Inventory shrink — which includes inventory lost to theft as well as through operational and administrative hiccups — has also weighed on Dollar General’s profitability. The retailer anticipates a $100 million headwind from shrink as the issue worsens, Owen said in August.

At the time, Owen said the company was tackling the problem by reducing its inventory position, refreshing and refining its processes, using additional tools and technology, and improving execution in stores.

Shrink is another area where Vasos is looking to make changes. The incoming CEO told the J.P. Morgan team he plans to monitor in-store inventory levels in real time as opposed to once a year. That, in turn, could lead to immediate differences in on-shelf availability, and would change the company’s planning and accounting processes.

Dive Brief:

• From factories to freight, Abercrombie & Fitch’s supply chain is improving from 2022, with costs down, performance up and extra capacity in production, executives said on the company’s Q2 earnings call in late August.
• “With a functioning supply chain, we can once again run the business the way we would like, leveraging chase to read and react and drive inventory receipts,” Scott Lipesky, the apparel company’s CFO and COO, told analysts.
• With shipping times improving and merchants chasing more product, the company reduced inventories by 30% YoY in Q2. Operating margin was 9.6%, a “significant improvement” from a year ago made possible in part by falling costs for freight and raw materials, the company said.

Dive Insight:

Abercrombie, along with many of its peers in the apparel space, is reaping the benefits of a supply chain that is, as Lipesky put it, “in a good place.”

It’s not just costs, but the performance and capacity of the company’s supply chain that is giving Abercrombie’s operations and profits a boost.

“When you think about transportation, inbound ocean sailings are better than they have been in years,” Lipesky said. “Timing is better. Fulfillment rates are better. And then even when you get on the ground here in the U.S., there's been some really good activity with a lot of the unions settling, whether it was rail, most recently with UPS, [or] West Coast ports.”

The executive also highlighted production. “There’s capacity out there in the factories, which is nice for us to be able to run a lean inventory business,” Lipesky said, adding that the extra production capacity also helps the company be fast in responding to demand.

In other words, to stay disciplined in its inventory management, Abercrombie needs the rest of its supply chain operating at a high level. That allows it to chase product as it follows demand signals.

“This Abercrombie business is very traceable now with the supply chain where it is,” CEO Fran Horowitz said on the call. “We've got a very strong sourcing and supply team where they're very agile. They work with the teams every week, respond to the business and can chase into what's working.”

Ultimately, leaner inventories and product chasing contributed to better margins and higher profits. As Horowitz put it, “With clean current inventory, we controlled the promotional calendar and reduced discounts in the second quarter, further supporting gross profit rate expansion from last year.”

Others in the industry have also drawn confidence from a loosened supply chain to cut inventories. For example, Guess Inc., backed by normalized receipt timing as well as automated inventory planning and allocating systems, is eyeing a significant inventory cut. Kohl’s has also made accelerated cuts to its inventory in 2023 to clear room for chasing demand.

Dive Brief:

• Comparable sales in Q2 were up across all TJX Cos. banners and up 6% overall as the off-price retailer once again benefited from the industry’s excess inventory. 
• “[A]ll indicators are there will be a continued additional supply at least over the next six to 12 months,” CEO and President Ernie Herrman told analysts in August.
• Aside from the excess stock from brands and retailers, TJX’s assortment has also benefited from the demise of Bed Bath & Beyond’s physical retail business. Hermann said the home goods retailer’s fate “creates additional supply of buying opportunities.”

Dive Insight:

So far in 2023, TJX executives have described the availability of products out there for its buyers to snap as “phenomenal” — a word used in every one of the company’s earnings calls in 2023 so far — and “outstanding.”

For the off-pricer, others’ pain is its gain. Retailers and especially individual brands have been working through inventory overages as they try to navigate choppy demand, with consumers braced against inflation and gloomy economic moods.

For nearly 50 years, the company’s T.J. Maxx banner has functioned as a channel for others’ excess inventory. What retailers can’t sell at full-price becomes a buying opportunity for T.J. Maxx and its sister banners, including Marshalls and Home Goods. 

The range of product on the market now has been a particular boom for TJX, which sells across consumer demographics and income levels with what it calls a “good, better, best” approach to product procurement and sales.

“If you look at most retailers around us, very few do that,” Herrman said. “They're zeroing in on certain demographic segments, which could include age or fashion looks or different price levels. And we don't do that. And I think that will continue to be a benefit to us over the next five to 10 years.” 

The strategy means it can attract a wide array of product and give brands some confidence that their value with customers won’t be diluted by appearing in a TJX store.

It also helps smooth out any bits of scarcity within categories in a given quarter. “We still have those pockets of opportunity where we don't have the mix balanced exactly the way we want it to be,” Hermann noted while also pointing to the company’s 6% growth in comparable sales. 

The company’s supply base is enormous and critical to its success, with more than 1,200 merchants in its buying organization. “This vast network of changing vendors, which numbered approximately 21,000 over the last year, is the reason why we are so confident that there will always be more than enough inventory in the marketplace for us to buy,” Herrman said. 

Along with retailers looking to clear inventory, those merchants have also taken advantage of struggling rivals in the home goods space. Hermann said TJX has taken market share from Bed Bath & Beyond over the years as well as more recently struggling online retailers in the market.

Bed Bath & Beyond’s suppliers have been turning to TJX and its Home Goods banner — along with other rivals, including Overtstock, which recently acquired the Bed Bath & Beyond name. 

“At the retail level, customers need another place to shop,” Herrman said of Bed Bath & Beyond. “But for our merchants, they get to take advantage of additional supplies. And we mean even more now to certain vendors, because now they have less places for them to sell their goods.”

Dive Brief:

• Walmart plans to have employees make more last-mile deliveries as the retailer grows its third-party fulfillment capabilities outside of independent contractors, President and CEO Doug McMillon said at the Goldman Sachs Global Retailing Conference in September.
• The number of deliveries currently made by Walmart associates is small compared to the amount handled through independent contractors, particularly those on the company's Spark Driver platform, McMillon said. But as Walmart builds out its last-mile network, it will own more vehicles and have employees deliver more orders.
• "We have already demonstrated that we can serve third parties, whether it's last mile or it's fulfillment services, and that will just continue to get bigger within the U.S. and in some of the other markets that we've got," the CEO said.

Dive Insight:

Walmart is rekindling its efforts to have employees make deliveries as online ordering activity has surged in recent years.

In 2017, Walmart began testing the use of store employees to deliver online orders from stores to customers in select markets. Employees could volunteer to make deliveries after finishing their shifts while on their way home for additional compensation.

Walmart quietly ended the pilot program in 2018 after the initiative failed to gain traction with employees that "balked at having to use their own cars and personal insurance policies," Reuters reported.

That was before the COVID-19 pandemic turbocharged e-commerce activity, spurring top retailers to strengthen their fulfillment and delivery capabilities. Walmart's store-fulfilled delivery sales nearly tripled over a two-year period, CFO and Executive Vice President John David Rainey said on an earnings call in February.

Walmart has leaned on the thousands of independent contractors on its Spark Driver platform, its largest delivery provider, to complete many of these orders. Added capacity would be welcome as the company scales up its local pickup and delivery services and onboards new customers for Walmart GoLocal, its white-label delivery service.

Even a small percentage of Walmart associates making deliveries could significantly boost the retailer's delivery capabilities. As of Jan. 31, Walmart employed about 1.6 million associates in the U.S.

Dive Brief:

• Ulta Beauty has expanded its ship-from-store capabilities to 276 new locations, offering faster and more cost-effective deliveries to additional customers, CEO Dave Kimbell said on an Aug. 24 earnings call.
• That represents a sharp jump from the 115 Ulta stores that fulfilled e-commerce orders as of Jan. 28. The company now fulfills e-commerce orders from 400 stores total, Kimbell said.
• Ulta has also expanded same-day delivery availability "to essentially every store," according to Kimbell. The company, which had 1,362 retail stores as of July 29, offers the service through DoorDash.

Dive Insight:

For Ulta and other retailers, such as Walmart and BJ’s Wholesale Club, ship from store has developed into a valuable strategy in the fulfillment playbook.

Store-based fulfillment didn't exist in any meaningful way for Ulta pre-pandemic, said Scott Settersten, its CFO, treasurer and assistant secretary. But as e-commerce demand boomed for the beauty company following the COVID-19 pandemic, Ulta leaned into the method.

This allowed the company to squeeze more revenue out of its retail locations while boosting delivery speeds. Store-based fulfillment of digital orders offers "a much more efficient delivery to the consumer and a much better overall margin profile of those sales," Settersten said.

In fiscal year 2022, Ulta stores fulfilled 31% of the company's digital orders, up from 28% the year prior. That metric increased further in the company's most recent quarter, covering 39% of digital orders, Kimbell said. Store fulfillment activity includes ship from store, same-day delivery and buy online, pick up in store capabilities.

"Guests continue to shift effortlessly between physical and digital channels, depending on their individual needs, and we are committed to meeting them wherever they are in their beauty journey," Kimbell said.

Kimbell also shared updates regarding other Ulta supply chain milestones on the call. Ulta's new market fulfillment center in Greer, South Carolina, began receiving inventory in July. The company also installed a new automated storage and retrieval system in its Greenwood, Indiana, distribution center to increase capacity and boost productivity.

Nothing for retail inventory planners has been easy over the past three years. After the shortages of 2020 and 2021, the industry spent the past year trying to unload products as consumers cut their spending in the face of steep inflation.

Although down from their peak, many inventory positions remain elevated for current sales levels.

“I've worked at multiple apparel retailers recently that have more inventory than I've ever seen,” said Matt Garfield, managing director with FTI Consulting. “It looks like you're walking into a peak season distribution center and we were in the middle of February, March.”

Even though the era of bare shelves is not far behind the industry, many are learning to live on leaner inventories and plan to chase products as needed in 2023 and beyond.

In doing so, retailers are prioritizing cost control and margin protection over the risk of lost sales.

“A little scarcity is not a bad thing,” said Joe Feldman, senior managing director with Telsey Advisory Group.

Inventory levels have peaked. But they’re still bloated.

In June 2022, Target issued a mid-quarter warning that its profits for the period were in for a significant hit as the retailer worked to “right-size its inventory for the balance of the year” amid a “rapidly changing environment.” The retailer blamed intense pressure on consumer spending from inflation on necessities, including food and gasoline.

Target led the way, but discretionary retailers, with few exceptions, spent the rest of the year trying to clear inventory. Analyzing retailers across major sectors, Telsey Advisory Group analysts found that, across segments, inventory growth averaged at 46% in Q2 last year. In apparel and e-commerce, that figure was considerably higher, at 65.6% for both sectors.

“Coming out of 2021, inventory was really lean, lower than it should have been, because you couldn't get goods and everybody was chasing,” Feldman said. “I think the miscalculation was the demand level.”

Retail inventories hit their peak in October 2022, when they were up 18% from 2021 levels. Inventories have since fallen considerably but remain well above where they were three years ago, or even a year ago.

 

 

An improving supply chain has magnified the problem, at least on paper. By February, overall schedule reliability in ocean freight was up month-over-month by 7.7 percentage points and up year-over-year by a “staggering” 26 percentage points, according to DHL.

For consumer companies, that means goods have been shipping faster and arriving earlier than a year ago, which shows up in inventory levels. Apparel sellers such as Under Armour and PVH have noted this in their earnings. At PVH, which owns the Calvin Klein and Tommy Hilfiger brands, inventory was up 34% YoY at the end of Q4.

“We have seen steady progress over the course of 2022 towards pre-pandemic production capacity and significantly improved delivery times,” PVH CFO Zac Coughlin told analysts in March. “And in the fourth quarter this year, we experienced much earlier receipts of inventory as these supply chain and logistics disruptions had eased.”

Excess is costly up and down the supply chain

The inventory story played out differently for retailers and many of the brands that supplied them. As retailers moved to cut back their positions, wholesalers were often left sitting on excess stock.

“Wholesalers really got hammered,” Garfield said.

Apparel sellers GIII Apparel Group and VF Corp, for example, both cracked 100% inventory growth last year, according to Telsey Advisory Group analysis. Nike, one of the largest apparel brands in the world, hit 44% inventory growth in the period ending Aug. 31.

“If retailers have too much inventory, they're going to stop purchasing, or slow down their purchases, or push out their purchases from their vendors,” said Joel Wolitzer, SVP and business development officer with Rosenthal & Rosenthal, which provides factoring and other financing services. “We have seen that slowdown on multiple levels.”

For merchandise suppliers, life can be made tougher by the fact many retailers don’t place firm purchase orders, which means their vendors have to place informed speculative bets on how much a retailer will purchase, informed by a retailer’s projections. Even purchase orders can be changed or delayed.

Suppliers producing private label merchandise for retailers can be put in an especially tight spot if their buyer decides to pull back on their orders.

“Those goods can only go to that retailer. Suppliers can’t sell them anywhere else,” Wolitzer said. “So they’re kind of stuck.”

For larger wholesale brands, they may have ended up with higher inventory levels than their retail partners, but that’s not necessarily the worst-case scenario if they have their own sales channels.

“It's probably better for, say, Nike or Adidas to control the way they clear through the excess inventory,” Feldman said. The alternative, he added, is to “put it out there in the market and let the retailers decide what to do with it, and just cut price and potentially impact the brand.”

For all players in the market, inventory excess is costly. Additional warehousing can get expensive. As Wolitzer noted, if companies have to borrow to pay for that warehousing, then there are financing expenses such as interest as well.

Operational efficiency and capacity also declines once a certain amount of space in a warehouse is filled, Garfield noted.

"It's a very big impact to your overall profitability — your cost per pick, cost per unit, those kinds of core profitability measures that we look at for distribution,” he said.

Have retailers learned their lesson? And which lesson?

The past two years raise fundamental questions about how to buy and plan inventory, and can yield some contradictory answers. One of the biggest is: Is it worse to have too little inventory in boom times or too much in downturns?

“Two years ago, you just had to have inventory. If you had it, there was a buyer out there,” said Oliver Timsit, founder of the apparel brand Oliver Logan. “We’ve come to terms with the fact that we can’t have something for everyone.”

With supply chain problems easing, many of the same tensions that predated the pandemic are now coming back into play. While out-of-stocks could mean the opportunity cost of a lost sale, overstocks come with financial costs of storage and financing costs.

Inventory excess also comes with opportunity costs by tying up working capital, and, perhaps most importantly, means less space for fresh products.

“Much as we all thought that the retailers learned their lesson — that they're better off ordering less, chasing demand a little bit, and having very clean, profitable sales, meaning fewer markdowns — they all fell into that trap of: ‘Oh, if we just have more, we'll sell it,’” Feldman said. “And then they got caught.”

Should demand recover, Feldman thinks retailers will have an easier time chasing inventory than they did in 2021 given normalizing supply chains.

“Those bottlenecks are gone," Feldman said. "So if you do have much more normal ramping of production on the manufacturing side, getting it here shouldn't be too much of an issue, at least in the near term. I’m hopeful these guys will be smarter about it.”

Still, retailers are unlikely to ramp up purchase orders anytime soon — even if demand does come roaring back.

“I think it’s going to be awhile before merchants and executives are really ready to place that bet for a large inventory position,” Garfield said. “Those conversations were brutal last year. The earnings — they weren’t fun calls, and I don’t think anyone wants to go back to that time.”

The year 2022 broke the crystal balls.

Some of the largest, most sophisticated companies in the world overbought or overproduced inventory by many millions of dollars. The reason, at its simplest, is that consumers did not behave as predicted.

Planners don’t have the luxury of blaming consumers for not acting according to their forecasts — especially when many of those customers were reacting to historic inflation in food, fuel and housing.

“Demand planning went out the door for three years,” said Rick Jordon, senior managing director with FTI Consulting. “Now they’re picking it back up, because they have all this excess inventory everywhere. And they’ve forgotten how to do it, or they didn’t do it well before.”

After three years of pandemic disruption and economic volatility, sharpening demand forecasts and inventory planning across industries seems both as imperative and challenging as it has ever been.

To get better results, companies are turning to new data sets and new technological tools like artificial intelligence to analyze them.

From spreadsheets to AI

An executive survey by McKinsey from early 2022 found that spreadsheets are still the primary planning tool for supply chain leaders, with 73% of respondents relying on them.

But, 43% said they planned to use artificial intelligence and machine learning for some planning activities. Another 17% said they planned to use AI and machine learning for most activities at some point.

A survey this year from BlueYonder, a supply chain software company, found that demand forecasting and inventory optimization are among the top uses of AI and machine learning technologies by supply chain executives

“We're moving well beyond Excel, and just moving to a more advanced tool set,” Ron Scalzo, senior managing director with FTI Consulting.

In Jordon’s view, AI technologies will at some point help remove human bias from forecasting and lead to more systematic predictions, as well as run multiple predictive scenarios at the same time.

Jordon noted that AI is needed to process through many data sets and help make sense of a company’s own internal data. “Most organizations have a lot of data,” Jordon said. “Are they using that to the best of their ability, utilizing the best technology and ignoring that noise? That’s really where the next three or four years of development will happen.”

Finding the right data to analyze the right way

At the most basic level, AI takes in data and spits out predictions. To get the best predictions, the data fed into them might matter even more than the AI tools themselves.

“There are systems pulling in data which is lying inside the company already, from across their enterprise systems, POS systems, the inventory levels from their stores and all that,” said Meher Dinesh Naroju, director of AI services at Centific. “There are very few companies that actually go outside of this box and get data from sources that are completely unstructured.”

Such data sources include things like social media, which can provide clues about burgeoning market trends. Customers are “actively engaging and leaving opinions and clues about various things they intend to do in the market or a specific category,” Naroju said.

Even images from a retailer’s store cameras might house data relevant to customer behavior in the aggregate, including reactions to certain products, brands and categories. “It’s a long shot, but it can help,” Naroju said.

Other sources, such as weather data, can provide early hints about supply chain timelines and inventory arrivals, he also noted.

Still, all of these data sets have to be put into the context of local and regional cultures and other marks of differentiation.

“It is of the utmost importance to pick and choose what data you need and very clearly segment the data you want to analyze,” Naroju said.

Once a company has the best, most refined and useful data it can get, that’s where AI tools become critical. The technology can derive insights from large pools of unstructured data that “no human being can do in so short a time,” Narajou said.

But even with the most creatively sourced data and advanced tools available, a prediction is still just a prediction.

“If you crack the code on a perfect forecast with the consumer today, you're quickly going to be the richest person in the world,” said Jake Self, vice president of operations for third-party warehousing and logistics company Smart Warehousing.

‘So much noise’

Businesses for generations have relied on the past to help them anticipate the future. That may seem outdated after the pandemic and then inflation scrambled the usual patterns, with volatile cycles piggy backing on each other since 2020.

But for many, historical trends are still the most useful forecasting data. “It’s not especially sexy, but we’ve actually philosophically been using the perspective that history is the best predictor of the future,” Destination XL Group CEO Harvey Kanter told Supply Chain Dive in an April interview.

“I think there's been so much noise in the last three-plus years that the roller coaster we’ve been on is almost impossible to predict,” he added. “I don’t know that the greatest level of AI and ML can predict what the consumer is going to do.”

Kanter went on to note that the apparel retailer still looks at pre-pandemic revenue and historical revenue contributions by day, week and month over the past 10 years, which he said has remained remarkably consistent.

Other businesses simply don’t have the budget to pay for or justify advanced technological tools. Smart Warehousing’s clients run the gamut from small brands operating out of their garages to Fortune 500 companies. For some of the smaller companies looking for replenishment and warehousing help, their forecasting process amounts to “hopes and dreams,” Self said.

For those companies, historical data is by leaps and bounds better than no data. “We've spent a lot of time on our replenishment program, really putting an algorithm in place that learns and understands based on historicals where we're going to need to be,” Self said.

Smart Warehousing can do that having invested in forecasting and replenishment technologies for more than two decades, and with an entire team of specialists dedicated to that one skill set. An algorithm for cold replenishment operations out of Missouri “looked like something out of Good Will Hunting,” Self, referring to the film that features actor Matt Damon playing an unknown mathematics prodigy.

But even with those resources, prediction is still tough in the current environment. “If you're not planning for an element of the unexpected, then you're probably not planning right,” Self said.

Despite its namesake, inventory excess isn’t really a problem at Overstock.com. That’s for the simple reason that the online home goods retailer doesn’t hold much of its own product. 

The company pioneered the dropship model back in the early days of internet shopping and today has a network of 2,600 partners that sell through the website. 

In one sense, that has made the company’s model relatively immune to the operational headache of inventory pileups other retailers have contended with. But for Overstock, it’s everyone else’s excess that has been the problem. 

The company’s revenue fell by 30% in 2022, and it lost some of the market share it had gained in the period since the pandemic began, which initially brought a surge in both online and home goods shopping. 

As peers struggled with falling demand and inventory buildups, they have discounted heavily to keep goods flowing and keep sales from cratering. And with prices falling, Overstock lost some of its competitive advantage last year. 

“It's created more people playing in our space that really can't afford to play there,” Overstock CEO Jonathan Johnson said in an interview. 

Expensive, slow-moving stock

Overstock might not own most of the inventory it sells through its website, but inventory gluts at its suppliers have a major impact on the retailer’s business. And the movement and pricing of that inventory is not always a simple matter of supply-and-demand economics. Banks and other financial players play a role in the sector’s inventory and sales dynamics. 

Overstock suppliers still have excess inventory bought when stock was expensive to acquire because of supply chain dynamics, Johnson explained. Now inventory is cheaper to bring in, at the same time as consumer demand is falling. But asset-based lenders that use inventory to back loans, and thus tie loan amounts to inventory value, can prevent suppliers from discounting that inventory deeply enough to move it. 

“Sometimes the banks are managing those receivables,” Johnson said. “And banks don't necessarily think like retailers who need cash freed up so they can make more cash. They think, ‘We need the full return on our loans.’” 

The upshot of all that is suppliers in the sector are still working through old inventory more slowly than they and retailers would prefer. 

To Overstock’s advantage, in Johnson’s view, is the company’s strong cash position, which helps it pay on a quicker payment cycle — 15 to 30 days — than suppliers might find elsewhere in the industry. That helps those suppliers turn their inventory into cash and keep their financial backers happy. 

Johnson told analysts in February that the company anticipates the current industry inventory glut to continue at least through the first half of 2023. 

Winning over new suppliers the old fashioned way

As Overstock eyes future growth and tries to win over new suppliers and brands to sell on its website, the company has done something it doesn’t normally do: buy inventory.  

Specifically, the retailer is trying to grow its presence in what it calls giftable home products such as housewares and small appliances. Items, Johnson says, that one finds on shelves of struggling retailer Bed Bath & Beyond, which has been scrambling to avoid bankruptcy in recent months. 

That company’s problems have become famous. Bed Bath & Beyond’s CEO said in January that its inventory cratered in Q4 as suppliers — concerned about the retailer’s financial viability — tightened up terms and pulled back on shipping to the company.

Analysis from DataWeave in January found that Bed Bath & Beyond’s inventory availability plummeted in 2022 beginning and July and worsening through the year, while levels among its peers remained stable. 

As often happens, one retailer’s loss is others’ gain. “We saw an opportunity to go to those suppliers that either weren't getting paid or canceling their contracts [with Bed Bath & Beyond],” Johnson said. 

And so Overstock has been trying to win over new brands, or convince others to increase their depth of product and sales with the retailer. Some wanted assurance that their products would sell on Overstock, so the company took the rare step of purchasing inventory from some brands.

“Some of them we said, ‘Look, we know you may have questions about our model — we’re going to prove it to you; we’re going to buy some [inventory],’” Johnson said. 

Had those brands plugged into Overstock’s dropship system, Johnson argued, they could have sold more, and more quickly, after the retailer cleared through the (admittedly conservative) inventory purchases it made. 

“Frankly, they left money on the table,” Johnson said. “We bought some, and sold out of it.”

Dive Brief:

• Tight inventory management at Macy’s continued into Q1, with inventories down 7% to $4.6 billion. Lean stock levels going into 2023 helped maintain merchandise margins even as sales fell in the quarter, the company said in its earnings release.
• The sales decline drove a 2% decrease in the retailer’s turnover rate. CFO and COO Adrian Mitchell told analysts that management expects changes to timing, volume and composition of receipts in Q2 to boost inventory productivity in the year’s second half.
• Despite the retailer’s discipline, it still made inventory missteps in Q1. Chairman and CEO Jeff Gennette noted that the retailer converted its assortment too early to warmer-weather merchandise, losing out on sales during a prolonged period of cold temperatures across the U.S.

Dive Insight:

While many retailers struggled to keep inventory from piling up in 2022, Macy’s remained relatively disciplined. Executives spoke at length about sticking to that strategy in 2023, with economic uncertainty looming.

The stakes around those efforts are amplified by deteriorating consumer demand, which Gennette said Macy's saw starting in mid-March. The company lowered its outlook for the year and tweaked operational plans as “macro headwinds continue and potentially worsen,” Gennette said.

For now, customers are currently still buying close to their needs, Gennette noted. “If demand improves, we will use our ample inventory receipt reserve, which is above last year's levels to chase into areas of strength as they materialize,” he said.

As Macy’s tries to stay nimble, Mitchell noted that the company has added to its pricing capabilities since the start of Q2 to help the retailer move inventory speedily and as profitably as possible. 

“This gives us the opportunity to bring an automated pricing solution that incorporates category elasticities, maximizes inventory turnover and optimizes unit sales left and margin dollar expansion to our owned inventory portfolio,” Mitchell said. 

Meanwhile, keeping its reserve of receipts open and allocating less in advance gives Macy’s “the liquidity that we wanted to build into the system, and that when a customer is signaling something in season, we're able to jump on that,” Gennette said. He added that “we're ordering every single week based on how things are trending.”

And as the company keeps space and budgets open to chase product as needed, Gennette noted that “there's plenty of inventory in the market” out there currently. 

To stay lean, the retailer is currently clearing through spring inventory with discounts, meaning pressure to its Q2 margins.

TD Cowen analysts led by Oliver Chen said in a research note that they have “confidence in management's ability to clear through spring inventory during 2Q and pivot the merchandise planning through the remainder of the year” to protect margins.

For Destination XL CEO Harvey Kanter, too much inventory is “the kiss of death.”

That fear comes from Kanter’s experience on the merchandising side of the retail industry. “You’re chasing your tail when you get over-inventoried and you can’t bring in fresh receipts,” he told Supply Chain Dive in a late-April interview. “Fresh goods are the lifeblood of retail.”

Plenty of retailers might agree, in principle, especially after the inventory flood of 2022. But executing isn’t always easy. In the minds of many, inventory is not seen as a cost or a drag but as a future sale.

Destination XL ended fiscal 2022 with its inventories at $93 million, up 13.7% over the past year. While in the double digits, that growth was substantially lower than the apparel sector on the whole. A Telsey Advisory Group analysis found inventory growth at 53.8% at the end of Q4 for the companies they covered in the apparel sector.

DXL noted that levels were up over the inventory-strained year of 2021, and by the end of 2022 inventory was 9.2% lower than the pre-pandemic year of 2019. Inventory turnover has increased 30% in that time.

To do that, DXL looks at inventory from across the supply chain, from the source to the store. “Every store in every market has some unique peculiarity,” Kanter said. “It may be a brand that sells better, it may be a size they sell better, it may be a color they sell better.”

Kanter said that DXL has “put in place the best AI, [machine learning] and inventory management practice that allows us to most efficiently create unique, relevant sorting in our stores.”

Chasing inventory

The effort to keep inventory under control starts with procurement and purchasing. “We have a philosophical point of view where we'd rather be chasing goods than chasing cancellations,” Kanter said.

In other words, DXL errs on the side of buying too little to stock its stores. Getting the numbers right is even more important, given how many different sizes the retailer stocks. CFO Peter Stratton said that DXL has a low unit-to-SKU count compared to other apparel retailers.

“They might be four or five units deep per size but, because we have two, three, four times the number of sizes, it's a lot fewer units that are in that stack of shirts on the on the shelf,” Stratton said. “Because our business is all about fit.”

Compared to pre-pandemic, “we are turning goods faster, we have less inventory, and we have not experienced some of the challenges that other retailers are which is they're really heavy on inventory and being promotional to get inventories back in line,” Kanter said.

To be more nimble about chasing inventory when the company needs it, DXL’s sourcing team lays the groundwork upstream.

The company procures materials in a pre-finished state and materials that are dyed but uncut. Even if the materials aren’t used the way DXL originally intended, they can still be made into other products for the company, meaning the supplier isn’t stuck with unpurchased finished products. Kanter says this reduces risk for both the company and its suppliers.

“We don’t have a lot of on-order in the warehouse. We don’t even necessarily have a lot of on-order with suppliers,” he said. “Because of all of the elements of procuring some part of the production process, they can produce much quicker.”

And while most of DXL’s come in on a boat, the company opts to send by air if it needs inventory shipped quickly.

Looking west to source apparel

Also helping to speed up shipping times is DXL’s increased sourcing from the Western hemisphere.

Some production programs have been moved to Western countries including Mexico and Nicaragua, according to the company’s most recent 10-K. Kanter couldn’t disclose exact figures but said Western hemisphere sourcing was in the double digits as a proportion of the total. The company is also eyeing possible sourcing opportunities in Guatemala and Peru, Kanter noted.

When deciding where to source, “quality trumps everything,” Kanter said. “But then it’s a balancing act between speed-to-market and cost.”

A significant chunk of sourcing comes from southeast Asian countries including Vietnam, Bangladesh, Cambodia and India. Less than 10% of products for DXL’s owned brands are sourced from China, a reduction process that has been ongoing over recent years.

“We’re basically not in China anymore,” Kanter said, pointing to the forced labor of the Uyghur people in the Xinjiang region as the primary risk prompting DXL to avoid in sourcing from the country.

Being specialists in big-and-tall apparel for men, DXL typically relies on specialized suppliers. In the clothing factories that make its products, equipment and production runs often are unique to the category given the complexity of the sizing and manufacturing. Even cutting tables need to be twice as large for shirts that are twice as large as standard sizes.

In all, DXL sourcing network includes just over 20 suppliers, in eight countries, with about 34 factories among them, and DXL sources a majority of its products directly.

“We have a pretty finite supplier base,” Kanter said. “It’s not like we have 100 [suppliers].” Ultimately that means deeper relationships with manufacturers, who, in Kanter’s view, benefit from the retailer’s growing market share and expertise in the big-and-tall sector.

“Where our suppliers can see through the day-to-day and look at the future, they're making a bet on us.” Kanter said.

Dive Brief:

• Walmart is working with suppliers in its grocery consumables business to “get costs down more as fast as we possibly can,” CEO Doug McMillon told analysts in May.
• McMillon said that general merchandise prices have receded from inflationary surges, but “dry grocery and consumables have held,” with prices continuing to rise and creating a problem for consumers “living paycheck to paycheck.”
• “We do need some of these branded suppliers that are in dry grocery and consumables to get top line focused more than they have been for a while,” the CEO added.

Dive Insight:

Many of the supply chain snarls that gave rise to historic inflation have eased over the past year, yet inflation has persisted. The result has pitted retailers against suppliers in some cases, including the largest retailer in the world.

Most commodity input costs fell last year from their previous peaks, with ocean freight, cotton, steel and lumber seeing some of the biggest drops, AlixPartners found in an analysis of Mintec Global data earlier in 2023.

David Bassuk, a managing director with AlixPartners and author of the analysis, encouraged retailers to negotiate savings of 15% to 25% with suppliers, which they could do largely by “clawing back most of the cost increases taken over the past two years.”

Some retailers are indeed negotiating on price, which has become public in some cases. The CEOs of spice brand McCormick & Company and Edgewell Personal Care (owner of brands such as Schick, Edge and Banana Boat) both cited Walmart in the press as among the retailers pushing back on cost increases.

Generalists like Walmart and Target, which have broad product assortments that include both discretionary and consumable categories, are uniquely positioned to watch how inflation has impacted consumers, with their grocery sales expanding and discretionary sales on things like apparel and home goods suffering.

On the call, McMillon framed the push to lower costs on food in terms of boosting a more profitable category mix for Walmart. Bringing down prices in lower-margin food and consumable categories “would help us with mix and free up cash for customers to use for discretionary goods,” McMillon said. 

He added, “It's a generalization, not everybody is in the same place, but we're looking for those [suppliers] that want to be aggressive.”

Despite retailer pushback, some brands have signaled that they intend to keep raising their prices in 2023. On an earnings call in March, McCormick CEO and Chairman Lawrence Kurzius noted that its price hikes have lagged its own cost inflation over the past two years. Kurzius said that McCormick plans to “fully recover” those costs through price increases over the course of 2023.