High up on a very long list of challenges for retailers is how to think about planning inventory for 2022. Forecasting is complex in any environment, but as the industry deals with supply chain constraints, rising inflation, shortage of raw material, labor, truck drivers, and much more, you’d be forgiven for simply wanting to throw a dart this year.

The good news is that signs point to a strong 2021 holiday season, with consumers planning to spend big. NRF’s recent optimistic prediction is very close to what we forecast back in September. Retailers will certainly get some indications from this holiday, but the very real inventory challenges will make it difficult to separate signals from noise when they start planning for 2022. In addition, each unique customer journey with its various assortment and fulfillment options complicates determining all the ways inventory can be moved around further.

The main takeaway: it is time to stop treating inventory as just a balance sheet entry – with the principle that less is better. The answer to how much inventory a retailer needs and where it should be at what time is the new forecasting challenge. We don’t have all the answers, but we do have some suggestions on how to start thinking about it:

Turn to consumer data for forecasting: Retailers are turning to predictive analytics based on consumer data to get a better understanding of not only which product is right for which customer, but also which location to fulfill it from for maximum efficiency (Figure 1). In an AlixPartners-Sourcing Journal joint survey of industry executives1, we found that 40% of retailers make more reactive assortment choices that result into more effective buys when they incorporate information sources other than just historical sales data in their analysis. Retailers and brands see the need to improve their demand-sensing capabilities and are either buying or investing in technologies to do so. Nike and Target are using technologies that help them forward-deploy inventory that can be flexibly used for either ecommerce or in-store orders. But most retailers won’t have the deep pockets to make investments or acquisitions, which means that finding the right fulfillment partner becomes imperative.

alixpartners retail viewpoint october 2021 figure 1

Create a plan for what to do when your forecast is off: The pandemic and its aftershocks underscored the fact that even with the greatest forecasting tools, retailers must be ready to make real-time decisions when sudden and unpredictable changes impact consumer behavior. These changes can take the form of unforeseen demand spikes, labor shortages, or disruptions in a fulfillment center or store. The solution is to create more flexible processes. Regardless of the sophistication of your technology, its generally easier (and less costly) to shift inventory originally intended for ecommerce fulfillment to stores than vice versa. For most retailers, distribution centers still offer the most throughput efficiency and scale to support responses to sudden changes in demand. Gap is increasing the capacity of its Ohio facility to handle up to a million units a day. This capacity (and its central location in the U.S.) will give Gap the flexibility to absorb demand spikes and keep store fulfillment focused on BOPIS and curbside services.

Reduce costs associated with clearing end-of-season inventory: Even at tight inventory levels, there will always be items that don’t sell at a specific store at their current undiscounted rates of sale. Retailers have taken steps – especially through the pandemic – to reduce this risk by integrating digital and physical inventories. A single pool of inventory goes a long way in addressing supply and demand imbalances. However, making integration truly work requires data accuracy that is a challenge for some, and even if executed well, runs the risk of excess fulfillment costs. For select items and stores prone to end-of-season margin erosion, retailers should look to off-load ecommerce demand early in the product lifecycle. If they can direct fulfillment of slower-moving items to stores without compromising the store experience, it offers the potential for quicker store inventory turns, more speed in fulfillment to customers, and reduced end-of-season shipping costs.

There have been many lessons from the pandemic, but one of the biggest ones has been the need to anticipate and prepare for disruptions. Retailers must use this opportunity to improve their inventory insights and operational processes so they can avoid the additional expense caused by out-of-position inventories. Those that do can look forward to a gift of sales and profits in the quarters to come.