Your inventory is ruining your business: how merchandise financial planning will help

Learn why traditional inventory models are outdated and how you can reignite your supply chain to capitalize on peak demand.

$740 billion is more than the combined wealth of Elon Musk, the Arnault family, Jeff Bezos, and Larry Ellison — the four richest people in the world. With that amount, you could buy the Dallas Cowboys, the Los Angeles Lakers, and the New York Yankees and still have enough left over to buy four international space stations. 

$740 billion is also the amount of total retailer inventories in 2022, according to McKinsey. This marks a substantial 12% bump up from the previous year. While McKinsey acknowledges that retailers are still grappling with some pandemic-related disruptions, this surplus of inventory is also due to overbuying, dwindling demand amid the cost-of-living crisis, and changing consumer behavior.  

Retailers have bought inventory mainly to avoid stockouts and hedge against supply shortages instead of aligning it to shifting demand. In essence, a lack of foresight is leading to inventory bloat that’s ruining your business.

Spiraling costs, changing demands

Across the U.S. and Europe, you only have to visit your local mall or high street to see vacant stores, with high-profile retailer casualties littering the headlines on an almost monthly basis. The inventory glut has been exacerbated by rapid inflation over the past two years across the global economy. This has led to higher interest rates, which, in turn, have caused inventory costs to soar, tying up cash and working capital when it is most needed to realign to new consumer spending behaviors. 

These costs manifest in the form of higher interest rates in trade finance, significantly increasing the cost of borrowing money. High idle inventory impacts your credit rating because it ties up both working capital and cash flow. Opportunities are missed, marketing and promotional spending is reduced, new products and services are delayed, and the downward spiral continues from there. 

As a retailer or supplier, your lifeblood is the efficient turnover of inventory for profit. This means swiftly moving products off the shelves at the optimal price point to generate a profit. However, when $740 billion worth of inventory remains stagnant, it not only starts to incur costs exceeding the product's value but also results in missed opportunities to expedite the turnover of higher-value products. 

While short-term tactics to offload some stock may work initially, the reactive nature of this strategy does not prepare you for any further disruptions, black swan events, or hiccups within your supply chain. They also make you less able to adapt to consumer change, read and respond to changing demand signals, and adjust inventory to meet them.

It’s time to look at this inventory challenge through new optics.  

Transforming with MFP 

Many retailers are still relying on a traditional automated replenishment approach to merchandising. At its core, this method involves monitoring stock levels and triggering additional product deliveries once inventory reaches a minimal point. It takes demand as relatively stable and managed through rolling forecasts.

However, this replenishment model doesn’t consider some fundamental financial questions: 

• What is the cost of carrying that inventory? 
• How can you keep that inventory profitable through its entire life cycle? 
• Is there another product that could turn more quickly for greater value? 
• How is new consumer spending reshaping demand, accelerating change, and putting greater pressure on your inventory turn? 

By examining inventory through a financial lens, the attention can switch from inventory itself to demand. It’s only by capitalizing on demand at the right time that you can help prevent $740 billion worth of bloat next year. 

Financial cost-driven inventory, or merchandise financial planning (MFP) as it’s widely known, scrutinizes the entire life cycle of the product, from origin to retirement and maps that onto a financial curve to ensure profitability throughout — all with an eye toward adapting inventory to constantly-shifting consumer demand behavior

For example, apparel items are seasonal with fluctuating demand throughout the year. With MFP, retailers can plot these demand fluctuations and align inventory and demand directly to their profit goals. This provides retailers with visibility of when they should achieve maximum profit, when to promote products, and when to put them on sale, and still maintain decent margins throughout the process. Contrast that to today’s model, where it is generally understood that a galling amount of apparel ends up in landfills, usually after reactive markdowns clear it off the shelves at a loss for next year’s items.

Maximizing demand spikes 

By being hyper-focused on demand and aligning inventory in real-time, you can not only avoid excess stock and all the financial precariousness this causes but maximize opportunities during short-term demand spikes and constant shifts.  

These spikes can be triggered by cultural events (new movies that garner certain crazes — Barbie and pink clothing or the Lakers winning the NBA championship), seasonality (holidays like Christmas, Halloween, and Diwali) or societal shifts (like the rise of veganism and healthy eating). They always cause ripples across the supply chain as suppliers and retailers seek to take advantage of changing consumer demand as it occurs. But this peak demand phase only has a certain shelf life and today’s Barbie pink might soon turn into Wednesday’s black. 

MFP equips retailers with the ability and agility to predict these demand signals and monetize their inventory before it even hits the shelves. At Anaplan, we apply a financial lens to your inventory focusing on demand rather than just stock levels and align your inventory to these demand spikes. 

Dynamic planning with Anaplan 

Our MFP solution integrates financial, inventory, sales, buyer, and merchandise data into one cohesive view. When combined with external market data, such as box office predictions, as well as data from suppliers and partners, you can conduct more accurate what–if scenarios, aiding you in predicting, planning for, and forecasting upcoming demand signals.

It’s time to break away from tradition and transform retail merchandising to align shifting demand to profitable inventory turn. Unyielding financial pressures, the realization that uncertainty is a fixture of today’s business environment, and the overwhelming risk of carrying a bloated inventory are compelling reasons to change. 

MFP could be the key to evolving your inventory to align with your financial goals and shifting demand — all helping to make sure U.S. retailers are only carrying enough spare stock next year to buy just one major league sports team.