Inventory Risks: How to Avoid Inventory Pitfalls

Target lost approximately $7 billion, closed all 133 stores, and laid off 17,000 employees after its disastrous expansion into Canada in 2011. The company faced several issues due to incorrect data entries, such as using inches instead of centimeters, wrong currency conversions, inaccurate product information, and missing key details. These errors can cause inaccuracy in the  processing and placement of merchandise on store shelves, leading to stockouts and operational confusion.

Despite efforts to correct these problems, including a dedicated "data week" to verify information with vendors, the pervasive data flaws persisted, contributing significantly to Target's eventual failure in the Canadian market. This Canadian misadventure highlights the critical importance of managing inventory risks effectively.

The consequences of inventory risks can be disastrous when overlooked. In this article, we’ll explore the meaning of inventory risk, its crippling effects on business, and how innovative solutions like Extensiv can help in risk mitigation.

What is inventory risk?

Inventory risk is the probability that the amount of goods you have in stock is either too much (overstocking) or not enough, leading to stockouts.

The fact remains that stock-outs cause walkouts—this applies to even ecommerce stores. When there’s not enough stock, you lose sales and send your customers into the waiting arms of your competitors.

However, If you also hold too much inventory, you risk products becoming obsolete. The increased inventory holding costs, along with other inventory costs, will eat away at your bottom line.

How to Avoid Inventory Risks

Mitigating inventory risk involves implementing strategies that address different aspects of the supply chain and inventory management processes. Here are some of them:

Always Have Safety Stock

Safety stock is extra inventory set aside by businesses as a buffer against unexpected fluctuations in demand or supply chain disruptions. Imagine your product went viral on TikTok leading to an unanticipated spike in demand. How would you satisfy this new, unexpected demand? It's simple: use your safety stock while waiting for a new order batch from your manufacturer.

Calculating the right level of safety stock involves thorough risk assessment and historical data analysis. Many businesses rely on guesswork or simple rules of thumb to set safety stock levels. However, these approaches are inefficient due to the complexity of today's supply chain environment. Also, the more sales channels you have, the harder it is to use spreadsheets to get an accurate number for omnichannel fulfillment.

We have done it for several customers, including Caskata, a woman-owned, design-driven brand. They struggled to manage an increasingly complex business, wasting hours on manual order management and financial tasks. Using Extensiv, Caskata centralized its inventory and order management processes and implemented an automated reordering system—resulting in optimized stock levels, 96 days’ worth of labor saved per year, and allowing the brand to scale without additional hires.

Accurate Demand Forecasting

Accurate forecasting is essential for maintaining optimal inventory levels and minimizing the risk of stockouts or overstocking. Predicting future demands precisely helps businesses avoid lost sales and excess inventory costs.

Extensiv's order management solution aids in this process by utilizing data to set inventory thresholds and recommend purchase orders based on key indicators such as sales velocity, forecasted growth, and lead time. Additionally, the order management system (OMS) offers comprehensive reports and dashboards that provide insights, including recommendations for discounting or bundling products to boost profitability. By leveraging these features, businesses can optimize their stock levels and enhance overall inventory management.

A perfect example of brands taking advantage of Extensiv’s extraordinary forecasting capabilities is Loot Crate, known for its unique monthly pop culture boxes. In the past, they struggled with a costly Enterprise Resource Planning (ERP) system that led to manual work and frequent errors, delaying order fulfillment and risking customer satisfaction. With Extensiv, Loot Crate improved its forecasting capabilities and gained real-time visibility across inventory, orders, and warehouse fulfillment. This allowed the brand to track inventory levels accurately and streamline its operations. As a result, Loot Crate reduced operational errors, fast-tracked shipping orders, and doubled its product lines and SKUs.

Be Decisive with Excess Stock

Stocks that aren't cleared off the shelf quickly can become excess stock, which puts your company at risk of obsolescence, additional holding costs, tied-up cash flow/working capital, and unnecessary waste. It’s in your brand’s best interest to make solid decisions about excess stock as soon as possible.

Here are some ways to offload excess stock:

• Bundle and sell slow-moving inventory with more popular SKUs, or explore kitting—packaging separate but related items and selling them as a unit.
• Work with suppliers to explore recycling or take-back programs. Some suppliers offer these options to customers.
• Try selling excess stock by offering discounts or running promotions.
• Depending on the product, you can collaborate with nonprofit organizations to donate excess inventory (and earn a tax deduction while at it).

Conduct Regular Audits

Regular auditing involves verifying that inventory records correspond with physical stock levels. This process helps identify discrepancies, prevent inventory management risks like theft, and reduce excess inventory.

Looking to audit your stock? Here are some tips to help you:

• Leverage inventory management software (IMS) like Extensiv to streamline and enhance the accuracy of the audit process. Pair your software with barcode scanners, RFID technology, and mobile devices to further enhance accuracy and efficiency during physical counts.
• Ensure that all employees involved in audits are well-trained to minimize errors and increase reliability.
• Consider implementing cycle counting to manage and maintain inventory accuracy continuously throughout the year.
• Analyze audit data to proactively identify patterns and trends and address underlying issues.
• Develop standardized audit procedures and inventory metrics to ensure consistency, accuracy, and integrity across all audit periods.

Know When and What to Outsource

Outsourcing some aspects of your supply chain and logistics operations can enhance efficiency and reduce inventory management risks. In particular, 3PL providers can offer ecommerce brands specialized expertise and infrastructure for inventory management, warehousing, transportation, and order fulfillment. This lets retailers focus on core activities while benefiting from the scalability and flexibility provided by their partners.

It’s important to carefully choose 3PL providers based on their track record and capabilities. You should also establish clear service level agreements (SLAs) and maintain regular communication to address any bottlenecks promptly. Explore our Fulfillment Marketplace to connect with Extensiv’s pre-vetted, world-class 3PL partners to efficiently scale your ecommerce business. All you have to do is tell us your business and fulfillment needs to get recommendations.

Ensure Total Inventory Visibility

Ensuring total inventory visibility provides the best ROI. With comprehensive oversight of inventory, your business can make informed decisions, optimize stock levels, and respond swiftly to changing market dynamics.

Modern inventory management solutions like Extensiv provide real-time stock levels, movements, and location updates. Our system features advanced analytics that helps businesses monitor inventory across multiple locations, giving decision-makers access to accurate and current information. The transparency gained from comprehensive inventory visibility allows you to spot demand trends, track future needs, and anticipate potential shortages or surpluses.

Before Quality Distribution adopted Extensiv solutions, it faced significant supply chain management challenges with its outdated, on-premises warehouse management system and manual processes. By implementing Extensiv 3PL Warehouse Manager and SmartScan, they automated routine tasks and integrated seamlessly with customers' systems, providing real-time inventory visibility and streamlined operations. As a result, Quality Distribution has doubled its customer base, achieved 99.9% inventory accuracy, reduced labor requirements by 60%, and has grown revenue by 35% yearly.

Reduce Lead Times

Reducing lead times mitigates inventory risk by improving supply chain efficiency and responsiveness. Shorter lead times enable more accurate inventory forecasting based on recent sales data, reducing the need for long-term predictions and minimizing the risk of overstocking or stockouts.

Faster stock replenishment allows businesses to adjust to market changes and seasonal demand. This ensures popular items are always available and lessens reliance on forecast accuracy, as inventory can be replenished based on real-time data, reducing mismatches between supply and demand.

To achieve shorter lead times, you can:

• Optimize procurement processes with technology
• Strengthen supplier relationships
• Invest in supply chain visibility tools
• Implement lean manufacturing practices
• Use advanced analytics to identify and eliminate bottlenecks
• Integrate your fulfillment software into a unified technology stack

Reduce the Chances of Inventory Risks with Extensiv

Extensiv offers a comprehensive suite of features designed to minimize inventory risks for 3PLs and brands through advanced technology and integrated solutions. Our platform provides real-time tracking and analytics, allowing businesses to maintain optimal stock levels and reduce excess inventory. Automated reordering systems and predictive analytics ensure that inventory is always aligned with current and future demand, streamlining operations and improving efficiency.

• Extensiv's order management solution brings all inventory data into a single, centralized view, simplifying stock replenishment and order management.
• For logistics providers, Extensiv 3PL Warehouse Manager enables ultimate inventory accuracy so you know what inventory is in stock and where it is at all times.
• Extensiv Integration Manager synchronizes inventory and order data across all systems, guaranteeing data consistency and operational efficiency while helping businesses stay ahead in a competitive market.

Book a demo today to see how Extensiv can transform your inventory management and propel your success.