No vacancy at the warehouse

Warehouses across the U.S. are filled to the rafters, and another wave of imports is coming soon as retailers stock up for the holiday peak season. That puts most companies in a pinch as they look for ways to deal with the extra inventory.

Conventional wisdom says that retailers can simply move their goods from expensive coastal distribution centers to cheaper rural locations or ship them directly to brick-and-mortar stores, “forward positioning” the inventory closer to consumers. But nothing comes for free in logistics; in practice, every option comes with its own costs and challenges.

For example, warehouse space is hard to find anywhere right now, thanks to soaring demand during the pandemic rebound. And even if you can find space, good luck paying for the truck to get your goods there; freight costs are higher than ever, thanks to rising fuel costs and tight capacity.

The conflict is real. A survey released in June by the shipping and mailing services provider Pitney Bowes showed that big retailers are now offering widespread discounts to shoppers as a way to draw down their inventory. “This summer will present both new challenges and new opportunities for brands,” Vijay Ramachandran, VP market strategy, global e-commerce at Pitney Bowes, said in a release announcing the survey’s findings. “Overstocks and markdowns will impact profitability but also create new openings to sell, as a large portion of consumers seek out deals—further aided by the return of [Amazon’s] Prime Day and other mid-year promotions. At the same time, our survey found a growing number of consumers cutting back on retail spending altogether as they react to record inflation and gas prices, and rising interest rates.”

Caught in a vise between rising stocks and slowing consumption, companies have to be more precise than ever in balancing the costs and benefits of carrying inventory, says Steve Denton, CEO of Ware2Go, a third-party fulfillment services provider that is owned by UPS Inc.

Waiting out the storm is not an attractive option, either. “The cost of storage is higher than [it was] a couple years ago because of the lack of warehouse space,” Denton says. “That means the margin evaporates if you carry [inventory] too long.”

FINDING NEW MARKETS

As for how companies can clear out some of that overstock, Denton urges them to explore new sales channels beyond the classic options of direct to store (DTS) and direct to consumer (DTC). For many merchants, an easy option is to liquidate their goods by selling them on a secondary market—such as Overstock.com or T.J.Maxx—or to sell them to the giant online retailer Amazon. 

However, Denton points out that even those options carry some costs, such as the extra labeling compliance costs required of “Amazon 1P”—or first-party—partners (meaning companies that sell their products directly to Amazon, which then sells them to consumers). Choosing the “Amazon 3P”—or third-party—option could cost even more, since only the digital sale itself occurs on the Amazon marketplace in that model, leaving merchants to take care of order fulfillment and shipping themselves.

As companies fight their way through the thicket of rising inventory management costs, many are turning to a middle ground between the in-store and online models, using their stores as small DCs. That’s where software analytics has become an important tool for balancing the strengths and weaknesses of the purely warehouse and retail sites, says Amy Tennent, senior director for product management at Manhattan Associates, a supply chain software developer.

As Tennent explains, the “simple” decision to forward-deploy goods to a retail store actually represents a potential minefield. In theory, stockpiling goods at stores should shrink a retailer’s shipping costs by enabling practices like “buy online/pick up in store” (BOPIS) or minimizing shipping distances for items sent to consumers, she says. In pursuit of that goal, some companies create “mini fulfillment hubs” within some of their retail sites, then task their store employees with picking and packing orders for home delivery.

However, that strategy may have drawbacks because managers at each location must decide how much store labor to devote to e-commerce fulfillment work, as opposed to serving customers in the showroom, says Tennent. Make the wrong choice, and parcel shipments could be backlogged for days, or impatient customers could walk out of the store. “You need to identify specific labor assigned to the job, otherwise your store team will have to [fulfill online orders] while also serving customers,” Tennent says. “If they get only two or three orders a shift, then store associates can do it just fine. But if it’s 50, 100, or 150 [orders], then they need the right tools in place: pick-path optimization, batch picking, prioritizing orders, sorting and staging the products after picking, and a packing station.”

Generally speaking, the retailers most likely to benefit from forward-deployment strategies are those that are able to assign committed resources to the task, Tennent says. Ideally, that would mean deploying a dedicated labor force for every shift, using cloud-based software like supply chain management and warehouse management systems to balance all the variables.

JUMPING IN WITH BOTH FEET

When it comes to inventory-balancing technology, retailers have other tools at their disposal as well. Another type of software for the job is an order management system (OMS), a critical tool for coping with overstocks in any location, says Carson Krieg, industry solutions + strategy, last mile, at project44, a provider of freight data and supply chain visibility solutions.

Typically, the best results come when a retailer has both OMS software and a limited number of stock-keeping units (SKUs), he says. That combination allows companies to choose the most efficient option. Three common choices are: 1) to deploy inventory to multiple microfulfillment centers (MFCs) that are dedicated to shipping orders; 2) to rent short-term shared warehouse space through a marketplace like Flexe, Flowspace, or Stord; or 3) to use their own brick-and-mortar locations in the local market and implement a ship-from-store strategy.

But of course, not every company is able to take full advantage of those options; many lack the necessary software or have an extensive product catalog. “If the retailer has a [large] number of SKUs, it may not benefit [it] to implement an MFC strategy due to the storage costs in local markets. It will depend on the maturity of [the retailers’] pick, pack, and ship processes and their cost to stock additional forward inventory,” Krieg says.

When it comes to clearing out their overstocked warehouses and reining in their storage costs, companies today have more choices than ever before. Among other options, they can ease the pressure by turning to liquidation websites, Amazon partnerships, shared warehouse space, and hybrid retail/DC facilities.

Choosing among those options may not be easy, but with the right logistics partners and finely tuned software, warehouse leaders can realistically assess the costs and benefits of every choice. No option offers a silver bullet, but experts say that strategies abound for managing the nation’s inventory glut.