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Report: Inventory Inaccuracy, Returns Cost Retailers $1.75 Trillion in Revenue

Overstocks, out-of-stocks and returns aren’t just hampering retailers’ omnichannel efforts, they are costing companies big when it comes to the top line.

Retailers worldwide are losing a whopping $1.75 trillion each year because of inventory distortion—the combined impact of overstocks and out-of-stocks—and needless returns, known as the ghost economy, according to a newly released report by analyst firm IHL Group, commissioned by OrderDynamics.

In the report, “Retailers and the Ghost Economy: $1.75 Trillion Reasons to be Afraid,” overstocks are measured as revenue lost to discounts, and out-of-stocks are defined as any time a customer comes in willing to buy something and leaves empty-handed either because the product isn’t available, they don’t have access to the product or didn’t get the personnel aid needed.

Preventable returns are costing retailers $642.6 billion each year, out-of-stocks $634.1 billion and overstocks $471.9 billion. The combined impact of the inventory fails amounts to roughly 11.7% of annual revenue for the majority of retailers.

“Retailers all too often focus on a variety of ways to drive revenue and increase comparable year-over-year sales, but retailers can realize huge gains by addressing opportunities that are in hand and slipping through enterprise fingers,” IHL Group president Greg Buzek, said. “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.”

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Improper marketing, mis-forecasting, supplier issues, internal personnel issues, mandated legislation from government organizations and even weather issues have contributed to losses from inventory distortion.

But here’s the breakdown: Bad processes cause the greatest distortion costing companies $285 billion, followed by data disconnect at $223 billion and bad forecasting, which is costing retailers $220 billion in annual revenue. Inconsistent sizing has retailers losing $63 billion annually, and return fraud is depleting $28 billion from revenue.

In North America, better forecasting tools have improved overstock and out-of-stock problems, but returns are driving nearly half of the ghost economy. In the Europe/Middle East/Africa areas, emerging markets with poor controls are making for increased overstocks and out-of-stocks, and stagnant economic growth has contributed to rising returns. In Asia/Pacific, a booming middle class is leading to more out-of-stocks of key merchandise.

When retailers were asked where to place the blame for overstocks and out-of-stocks, 29 percent of the time they cited poor process.

“Whether it is adequate refrigeration, proper training, adequate relationships with intermediaries, or disconnects between departments, the lost opportunities due to process issues that can be fixed are huge,” the report noted.

Prior to putting new platforms in place, however, retailers would do best to make sure an appropriate business process model is settled, IHL suggests.

Data systems issues were the second largest setback for companies surveyed.

“Retailers that can track underlying issues in a single system have the greatest opportunity to recapture lost revenue opportunities by taking action on hotspots,” the report noted. “Approximately 60 percent of those opportunities are due to retailers not systematically measuring the impact of overstocks and out-of-stocks. Another 25 percent is lost due to business units tracking the information but not sharing it across the enterprise. Finally 15 percent ($34 billion) is lost because systems can’t talk to each other.”

Addressing those inefficiencies and data disconnects could mean the difference of adding $117 million in revenue for every $1 billion in retail sales, or $2.9 billion bucks more for a $25 billion retailer, according to the report.

The “Retailers and the Ghost Economy: $1.75 Trillion Reasons to be Afraid” report is the first in a four-part series, the rest of which will further examine how overstocks, out-of-stocks and returns are haunting retail.