The True Costs of Poor Inventory Management for Multichannel Consumer Brands

The American Psychological Association (APA) defines control as "authority, power, or influence over events, behaviors, situations, or people." Though most of us accept we can't always exert control over our environment, there's ample evidence that the need for control is imperative for survival.

DTC, multichannel, and retail brands know this all too well, particularly when it comes to inventory management. Defined as tracking goods from purchase to sale, effective inventory management is crucial for any brand owner in their quest for control. That's especially true in the small-margin and extremely dynamic reality of ecommerce brands, where every error takes money out of the owner's pocket - financial leakage that can make or break a business.

The problems plaguing ecommerce inventory management

Unfortunately, inventory management errors are extremely prevalent in ecommerce brands as it contains inherent challenges. Maintaining accurate inventory records, for example, is anything but simple – especially when using manual practices or outdated systems. Whether due to data entry mistakes, lack of real-time updates, or poor synchronization with sales channels and other siloed systems, tracking inventory can quickly spiral out of control, easily becoming a nightmare.

When inventory tracking issues arise, and records are inaccurate, ecommerce brands face significant challenges. One major problem is stockouts and overselling. If inventory levels are underreported or sales are not promptly updated in the records, popular items may be mistakenly listed as available when they are actually out of stock. This leads to forced refunds and cancellations, and of course, to disappointing customers and damaged brand reputation. Not to mention the direct negative impact on the business's bottom line.

Furthermore, stockouts might force you to quickly restock to meet customer delivery expectations, resulting in higher fees for expedited shipping or for last minute loans.

Another critical issue is overstocking - where excess inventory leads to increased holding costs.

When inventory tracking is mismanaged, businesses may order more stock than necessary, tying up capital in excess inventory that could be used elsewhere in the business. This not only increases storage costs, including warehousing and insurance, but also risks products becoming obsolete. Excess inventory erodes profit margins and can lead to significant financial waste if products must be sold at a discount or discarded altogether.

Inaccurate financial reporting is also a serious consequence of poor inventory management. When inventory data is incorrect, the financial statements become unreliable, affecting the calculation of the cost of goods sold (COGS) and gross margins. This creates financial blind spots, making it difficult for business owners to assess the true health of their business. Inaccurate reporting can lead to poor decision-making, hinder the ability to secure financing, and cause tax compliance issues, potentially resulting in penalties.

Additionally, poor demand forecasting is another significant fallout from inaccurate inventory tracking. Without reliable data, businesses struggle to accurately predict future demand, leading to aforementioned overstocking or stockouts.

Other common problems of inventory management include operational bottlenecks and fragmented systems. Using multiple, disconnected tools can lead to severe inefficiencies, such as duplicated data entry and hampered visibility into inventory levels, causing delays in the fulfillment process and further contributing to financial losses.

The real costs of poor inventory management

Not only do brands need control, but customers, too. They want to feel in control of their own shopping experience, and inventory management problems that throw orders out of, well, order hurt them in a crucial spot—both psychologically and in terms of the customer journey.

After all, fulfillment delays are a key reason for customer dissatisfaction – one of the biggest costs of poor ecommerce inventory management. Recent market research conducted by Körber, a German supply chain technology provider, revealed that 67% of consumers have experienced delayed online orders lately, affecting their overall view of the brand, underscoring the importance of efficient ecommerce expense monitoring and real-time financial tracking to prevent financial leakage and profitability erosion and to enhance customer satisfaction.

Designed to understand consumers' criteria for making online purchases and their expectations for the post-purchase experience, Körber's survey gathered insights from 2,200 consumers across the US, Canada, Brazil, Mexico, Australia, Germany, France, and the UK. Key findings include:

• Speed (39% of upvotes) and convenience (27%) are the second and third deciding factors when consumers purchase online, after price (63%).

• 20% of consumers who experienced delivery delays would never order from the brand again.

• 30% of respondents would discourage family members or friends from purchasing from this brand.

• 29% will leave a negative review on social media or the brand's website.

"Customer expectations have only grown more complicated post-COVID," explained Chad Collins, CEO of software at Körber. "A good shopping experience can make a loyal customer for life. On the contrary, a poor experience can leave a wake of destruction. The importance of a frictionless customer experience cannot be emphasized enough."

Overall, the financial impact of poor inventory management is significant. According to a survey by advisory firm Coresight Research, misjudged inventory decisions account for an estimated 53% of unplanned markdown costs for retailers. An earlier study by retail analyst firm IHL Group found that overstocks, stockouts, and preventable returns add up to 11.7% of lost revenue for retailers.

On top of that, losing control over inventory management can also prevent brands from capitalizing on market opportunities. For example, when products are out of stock due to inaccurate inventory planning during a seasonal surge, leading to missed sales. On the other hand, you may be unable to respond to shifting consumer preferences because excess inventory leaves you without financial flexibility to stock new, in-demand items.

Clearly, inventory management problems are a significant contributor to financial blind spots, missed revenue, cash leakage, and eroded profitability.

Turning the tide with effective inventory management

These costs put multichannel brands that suffer from inventory management issues at a competitive disadvantage against the field. Not only are companies that manage inventory effectively well-positioned to outperform them in the short term, but their outlook is also gloomy, as poor inventory management has proven to stifle growth and increase brand owners' stress and anxiety levels.

In an effort to turn the tide, an increasing number of DTC and B2B retail brands adopt systems that address inventory management problems in ecommerce. These systems typically offer real-time inventory tracking, ensuring improved accuracy, better customer satisfaction, and reduced operational costs.

However, existing inventory management solutions often come with high costs, which can be a barrier for most online retailers. Plus, the complexity of many existing solutions, and the fact they are not native to financial ledgers, can lead to errors, ultimately denying brand operators what they need most to survive: control - especially over inventory management.