Retailers lose $1.75 trillion to 'ghost economy' of inventory distortion

Poor inventory processes and lack of systems integration causing overstocks, out-of-stocks and needless returns are to primarily blame for $1.75 trillion in retailer losses worldwide. Personnel issues are the third component of the inefficiencies.

This is a "ghost economy" of inventory distortion according to a study by IHL Group, with losses of $642.6 billion in preventable returns; $634.1 billion in out-of-stocks; and $471.9 billion in overstocks. This represents 12 percent of the overall worldwide retail economy, which is worth $14.5 trillion.

These losses amount to 11.7 percent of the annual revenue of a typical retailer. By addressing the inefficiencies and data disconnects throughout retail organizations, companies could add the equivalent of $117 million in revenue for every $1.0 billion in retail sales. In other words, this could result in an additional $2.9 billion in revenue for a $25.0 billion retailer.

Better-aligned systems, forecasts and insights can help recapture between 50 and 70 percent of these losses.

"Retailers all too often focus on a variety of ways to drive revenue and increase comparable year-over-year sales, but they can realize huge gains by addressing opportunities that are in hand and slipping through enterprise fingers," said Greg Buzek, president of IHL Group. IHL recently published the research study, "Retailers and the Ghost Economy: $1.75 Trillion Reasons to be Afraid," which was commissioned by OrderDynamics, an analytics software company. It is the first of a four-part series on the topic.

"These problems are within retailers' grasp to solve, but it requires more than data, more than business intelligence. It requires understanding the root causes of inventory and data disconnects and implementing the technology solutions and operational changes to address these revenue-limiting issues," he said.

The inventory and data disconnects lead to inventory distortion, or the combined impact of overstocks and out-of-stocks. The top three sources of this distortion, the study reported, are internal process failures, representing $284.9 billion in losses; personnel issues, resulting in $259.1 billion in losses; and data disconnects and systems that are not integrated, which represent $222.7 billion in losses.

"Retail CEOs are more challenged than ever to answer the growing omnichannel demands of consumers while providing profitable growth for owners and shareholders," said Kevin Sterneckert, CMO of OrderDynamics.

"With internal process failures, disjointed data and siloed organizations, the answers C-level retailer (executives) need are almost impossible to attain without access to new, innovative technologies purpose-built to deliver the full potential of an organization. This report gives clarity to the key issues that retail executives must focus on and outlines the steps needed to make improvements to their bottom line."

Personnel issues are a big part of the problem. As much as retailing has become rapidly automated, the industry at its core depends on people making the right decisions. This is especially true in perishable categories where a failure to meet deadlines can result in spoilage and lost sales.

Employees also play a big role in theft, damage and other write-offs. Employee and consumer theft represent losses of $161.6 billion or 1.1 percent of the average retailer's revenue. Theft with employee involvement is much higher than customer theft, the study reported.

For more:
-See this IHL press release
-See this IHL report

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