Why are Retailers so Overwhelmed by Overstocks?

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NO SURPRISE, the retail industry is swimming in excess inventory lately. Overstocks leapt forward by double digits in the latest quarter for a dozen of the nation’s largest chains, as they rebound from the supply shortages and out-of-stocks which have vexed them since early 2020.

Today on RetailWire.com, I weighed in on a lively discussion about this problem entitled: Why are retailers struggling so hard to balance inventory? Certainly 20, 30 and 40 percent leaps in stock on hand are partly a sling-shot effect, since retailers over-ordered desperately during the 2020-21 supply disruptions. The situation has been rough on all retailers, but the apparel leaders are taking early and aggressive markdowns on overstocks that arrived too late for missed seasons.

Opinionated as I am about inventory accuracy in retail, I jumped on my high horse with a critique of the global manufacturing and shipping industries. I tossed in a not-too-subtle swipe at Adam Smith’s “Invisible Hand” for good measure.

The implications span both micro- and macroeconomics. Long lead times are too often tolerated in the name of scale economies. Big plays in highly concentrated markets set the stage for massive disruption when things go wrong.

I admit I am an enemy of things that grow too large. I believe the blind pursuit of economy of scale may be the road to ruin for the global economy. There is such a thing as too big, too concentrated and therefore too vulnerable to manipulation and external events. [Think: Ukrainian sunflower oil or Taiwanese semiconductor chips.] All consumption is ultimately local, yet the retail industry doggedly seeks to marry immense scale on the supply side with individualized delivery of product to shoppers.

This is why I find much about the recent supply chain conversation to be infuriating. I lose patience with Wall Street and industry pundits who keep claiming that better forecasting software can counter the problems of excessive market concentration while blithely ignoring how we got to this place:

What’s the common tragic truth behind all these events and many more? Too much of one commodity concentrated in one place. A linear, brittle way of moving large quantities. Even calling this system a “supply chain” gives too much credit, because at least a chain has some flexibility. In the past year we have proven how rigid and vulnerable things really are. The visible proof is now clogging retailer warehouses. Following is an expansion on my RW comments:

Overwrought over overstocks

So much to unpack about the present overstocks problem:

First: Financial. Excess inventory is money standing still. This is just as true in a container ship anchored offshore, on a truck queued at the border, in a retailer’s D.C., or on store shelves. Free your cash or “agility” can never happen – no matter what high-priced consulting firm you hire.

Second: Operational. Retailers mostly suck at ordering, as near as I can see. There are some notable exceptions in grocery where perpetual inventory, forecasting and replenishment are handled using computer automation, but even the shining stars of the industry were thrown off their game by the COVID disruption. I suspect matters are far worse in sectors that depend on overseas manufacturing commitments, long-lead-times, and fashion trends.

Third: Structural. I can’t say this often enough. A supply chain that is built and fine-tuned for ultimate unit cost efficiency, scale, and centralization of process is inherently brittle. When one skewed container ship can close the Suez Canal for six days and disrupt the entire global shipping system, or when a sanitary crisis in one plant can cause a national baby formula crisis, we need to reexamine our ways of doing things.

This is a good time to ask ourselves, “Why does that ship (or that factory) have to be so big?” Is fewer and larger really the best way to organize a global economy? In any network with very few nodes, when one is broken the impact is far more crippling. In a linear supply chain, the risk is quite obvious. This concentration of capital and systems creates vulnerabilities to natural and technical breakdowns and creates tempting targets for bad actors – and yes, overstocks too.

A “mesh” economy with shorter supply lines and lead times, distributed redundancies, and massive interconnectivity is inherently more resilient and adaptable to short term events and longer-term change. This is not just my idea. Have a look at SupplyWeb.org.

Mass market economics, capital intensiveness and concentration of production are out of touch with the digital age.

– Tenser’s Tirades

From supply chain to supply web

I’m on a bit of a crusade about this, I suppose. I know it may sound radical to some, but Adam Smith’s Invisible Hand is screwing with us. That’s why a conversation about the present retail overstock problem set me off on this tangent.

It’s time to find ways to consciously de-concentrate markets. Shorter production runs and lead times. Smaller, smarter, closer manufacturing and food-growing facilities. (While we’re at it, how about de-centralized production of electric power with mesh connectivity and a fault-tolerant grid?)

Is supply chain visibility essential? Absolutely. When the foundations crack as they have over the past two-and-a-half years, elaborate AI systems and heightened visibility don’t change outcomes much – they just provide an earlier and sharper view of the disaster.

The Paradox of Scale, an aphorism I repeat often, states: The larger the retailer, the more remote it is from its customers. Maybe from their suppliers too. I would add the corollary that larger retailers also risk much larger inventory inaccuracies if they don’t find ways to de-concentrate their procurement methods. This is a set of circumstances that are ripe for radical re-design.

We are in the age of digital intelligence. It’s time to start converting the mass-oriented supply chain into a local-focused supply web that is inherently more resilient and adaptable to change.