- Circana
- 24 hours ago
- 6 min read
Table of Contents:
If out-of-stocks are a thorn in the side of shoppers, manufacturers, and retailers alike, managing too much stock is another problem with a host of consequences. Aging inventory and high returns contribute to a variety of challenges at the store level and likewise pose problems for brands.
Actively managing aging inventory and returns are important in protecting sales, preventing wasted stock, optimizing labor, and maximizing margin rates. Additionally, preventing and reducing these kinds of issues can be viewed as a strategic imperative for sustainable growth by transforming potential losses into revenue.
Understanding the Impact of Returns and Aging Inventory
As vendors and retailers know all too well, inefficient inventory management has consequences. Aging stock and returns spur many problems that impact the bottom line through lost sales and trapped inventory.
The results of inefficient inventory management extend beyond the cost of a good. Such challenges introduce operational and financial burdens that can severely impact a company’s bottom line and market standing.
How high return rates affect profitability and brand trust
High return rates can cut into profitability because items brought back to a store result in wasted inventory. While general merchandise products can often be resold, returned food products cannot go back into that stream. In addition to the lost cost of a product, returns incur additional expenses related to handling, processing, and disposing of those items.
Moreover, persistent returns chip away at brand trust and loyalty. If customers frequently receive merchandise that is damaged, expired, or does not meet their expectations, their confidence in the brand diminishes, potentially leading them to competitors.
The hidden costs of rundown inventory
Rundown inventory, which includes seasonal, discontinued, or excess items, carries its own set of hidden costs that impact profitability and potentially erode trust. For example, the longer a product sits in a warehouse or on a shelf, the higher the risk of it becoming damaged, stolen, or expired. This is particularly critical for items with a limited shelf life, such as foods and beverages. In technology categories, aging inventory can spur issues related to obsolescence.
Excess stock also ties up valuable capital and physical space. Many retailers have reduced or moved away from backroom storage in recent years because it often leads to products being lost, broken, or expiring before they even reach the sales floor. Inefficiently managed rundown plans can trigger inaccurate reordering, too, creating a cycle of overstock and waste.
Common Causes of High Return Rates
To tamp down return rates and manage rundown inventory, businesses must first identify the underlying causes. These often stem from a disconnect between product presentation, customer expectations, and internal processes.
Product mismatch and customer expectations
A primary driver of returns is a mismatch between what a customer expects and what they receive. This can be caused by poor product descriptions, unclear specifications, and, in the digital space, low-quality images. In other instances, product quality issues, such as faulty packaging or bad batches of product, can lead to a spike in returns. For example, a simple issue like ineffective glue on a cereal box can result in a plethora of products sent back.
Inaccurate demand forecasting
Poor demand forecasting is a major contributor to mismanaged inventory, including excess inventory. Misclassifying an item, such as placing an everyday product in a seasonal category, can lead to significant over-ordering. One classic example is canned pumpkin, which sells in high volumes in the fall and through November, but has lower sales the rest of the year. An inaccurate forecast that doesn’t account for this seasonality could leave a retailer with weeks or even months of aging supply if November order quantities persist into January.
Similarly, forecasting algorithms that apply a single rule across diverse categories, whether it’s yogurt or laundry detergent, can create imbalances. These systems may fail to recognize that what constitutes excess for a slow-moving item is normal for a fast-moving one.
Inefficient sales and fulfillment channels
Breakdowns in the supply chain can lead to elevated return rates. If a warehouse does not load pallets correctly, products can be damaged in transit and rejected upon arrival at a retailer’s distribution center. While this prevents the damaged goods from reaching customers, it creates costly inefficiencies and stock shortages. The data may show an order was shorted, but the root cause of damage during shipping requires deeper analysis to resolve.
Strategies to Reduce Return Rates
By adopting a data-driven approach, companies can proactively address issues that lead to high return rates.
Optimize product descriptions and visuals
Clarity is key. Retailers can work to ensure that online product listings, in-store signage, and packaging provide accurate and detailed information. High-quality visuals from multiple angles can help set realistic customer expectations. The goal is to give the consumer complete confidence in their purchase, reducing the likelihood of a return due to a product mismatch.
Leverage predictive insights to anticipate return risks
Data provides the visibility needed to identify and address potential issues and uncover patterns before they escalate. For instance, if a manufacturer’s data indicates that returns are spiking in a specific region, it could be tied to a particular plant or distribution center that is not properly loading outbound shipments.
Using advanced analytics, it’s possible to correlate return volumes with causal factors provided by retailers, such as damaged or out-of-code offerings. This allows brands to pinpoint systemic problems, whether it’s a production issue or a recurring problem in the supply chain.
AI-driven tools can further enhance this by integrating external data points, such as weather patterns or regional health trends. Brands and retailers can refine forecasts for seasonal items like cold and flu medicine based on the incidence of illnesses at a given time of year or in a particular market.
How to Maximize Sales from Rundown Inventory
As with returns, rundowns can be addressed with a strategic plan to minimize losses. The objective is to sell through the inventory while retaining as much margin as possible without triggering a cycle of reordering.
Identify which products still have market potential
Rundown inventory varies, by product type and the reasons for aging, so analyzing data can determine why an item is in excess and if it still has market potential. Is the product seasonal with limited post-holiday appeal, like grilling sauces in January or eggnog in May? Or is it an everyday item that was over-ordered?
Understanding context is crucial. For a seasonal item, the market potential is low, and aggressive action is needed. For an over-ordered staple, the demand still exists, but the supply is simply too high.
Time promotions strategically based on demand forecasts
A well-timed promotion can be an effective tool for clearing stock. Instead of
waiting until after a season ends to apply deep discounts, a proactive approach may yield better results. For example, offering a modest discount on a Christmas-themed item two weeks before the holiday can generate more revenue than selling it for pennies on the dollar on December 26.
That said, such promotional sales should not inflate future demand forecasts. Ordering systems must be intelligent enough to recognize that a sales spike was driven by a markdown and not trigger a replenishment order for the excess quantity sold.
Learn from performance trends to prevent future excess
Running out of product happens, but rundown events can be a learning opportunity. Manufacturers and retailers can use data to determine if the initial forecast was wrong or uncover any production issues. They can also leverage insights to determine minimum orders and create a “window” for a second round of orders.
An analysis should encompass the entire ecosystem, not just production efficiency. A
holistic view allows stakeholders to better understand total costs, and from there, brands can make more informed trade-offs between production run sizes and the risk of overstock.
Discover How Circana’s Data Ecosystem Helps Brands Turn Returns into Revenue Opportunities
Effectively managing returns and rundown inventory requires deep visibility across the entire supply chain. Circana provides a powerful data ecosystem that empowers brands to move from a reactive to a proactive stance.
By integrating POS, consumer, and supply chain data, Circana offers a 360-degree view of inventory levels from the manufacturer DC to the retail shelf. Our solutions provide daily insights into metrics like days of supply, inventory velocity, and in-stock percentages. This allows planners to see the overall risk in the network and identify inventory mismatches and return vulnerabilities before they become major liabilities.
