Halfway through 2022, inflation hit a 40-year high. Ever since, economists have been speculating about when, not if, a recession will become a reality. A lot of online sellers are concerned, as are the warehouses and distribution centers that support them.
Whether it’s the need to free up cash in your business or minimize write-offs, there are several considerations when it comes to optimizing your warehouse’s inventory. Proper planning and execution can help prevent errors in shipping and excess costs for storing overstock.
What You Need to Know About Recessions
We hear the terms “recession” and “downturn” a lot. But what do they mean, and when is the country actually in the midst of these conditions? According to the Federal Reserve Bank, “The downward slope of the business cycle is called economic contraction. A contraction is a period when economic output declines… Economic contractions often become recessions. A recession is a significant decline in general economic activity extending over a period of time (as a general rule, two economic quarters).”
The U.S. National Bureau of Economic Research states that there are a wide range of factors that can contribute to a recession. These include:
- High unemployment
- High inflation or deflation
- High interest rates
- Excessive debt
- Lower consumer spending
- Stock market crash
- Falling asset prices
- Rising oil prices
- Post-war slowdown
- Sudden economic shock
We generally don’t find out that there is a recession until we’re well into it. According to economists, the U.S. entered a brief recession from February 2020 through April 2020. If you go by the traditional definition, even with recent bank failures, the U.S. is currently not in a recession. But Fed economists warn that it is darn close, so it makes sense to plan accordingly.
How Inflation Can Affect Your Inventory
According to a CNBC survey late last year, nearly half (43%) of small business owners claimed that inflation is the biggest risk to their business. This is an increase from 38% in the prior quarter. So, how does inflation impact these businesses?
Inflation creates issues with product availability and causes changes in profit margins. And since just 2% of businesses have visibility in their supply chain beyond the second tier, this can make forecasting challenges more difficult.
Reports also reveal that some major retailers, such as Walmart, are opting to hold onto less excess inventory right now. The rationale is that this is a response to inflation, which has caused many consumers to focus their spending on necessary food items instead of general merchandise.
But shifts in consumer spending aren’t always tied to inflation. In some cases, consumer habits have changed in the post-pandemic era. For example, Macy’s was recently stuck with an excess amount of activewear and casual clothing as shoppers returned to purchasing more social outfits and officewear.
If you decide to adjust your inventory levels, it’s important to gauge both economic and other market conditions. Various trends can also have an impact on your decisions.
Optimizing Your Inventory During a Recession
There’s no simple answer to optimizing your inventory during a recession. In fact, the strategies of businesses vary widely. According to Gartner, more than 40% of retailers and manufacturers are increasing their inventory to safeguard against shortages, while 33% are reducing their inventory. What’s the rationale for these decisions?
Advantages of Increasing Stock Levels
Depending on your industry, it might be beneficial to carry extra stock of high-demand items. For example, if you do an excellent job of attracting or retaining customers but can’t fulfill orders due to stockouts, those people will likely find a competitor who can take care of their needs.
Advantages of Lowering Stock Levels
Sales can slow during economic downturns, creating excess inventory. Maybe customers have less money to spend on certain items or don’t want to spend money on the same items that are now more expensive. Holding excess inventory can create problems in a recession when the money you invested in that inventory isn’t available for other business purposes.
Finding the Proper Inventory Balance
Order too much inventory, and you could be placed in an unfavorable financial situation. Order too little, and your business could face stockouts and lost business. There’s certainly a balance between these two. The trick is finding the right one for your business.
Operating a Successful Business Through a Recession
Operating a successful business during a recession is certainly challenging but not impossible. Here are a few tips for better inventory management during an economic slowdown.
Reduce Your Lead Time
You can get your products into your warehouse sooner if you can negotiate faster lead times with your suppliers. This also narrows the window for price increases to protect your margins. If the import prices are high, you can always store items locally to reduce transportation costs.
Create Seamless Connections
Lack of internal and external communication can be incredibly damaging, even during the best economic conditions. Delayed or missed communications can mean missed opportunities or various errors that impact your customers. You can set up automated re-ordering for inventory, with levels you can adjust as market conditions change. Also, relying on a trusted warehouse management system (WMS) can ensure better overall communication.
Build End-to-End Visibility
If you want to optimize your inventory, you need a real-time view of your operations and the supply chain. Implementing RFID tags is an excellent solution. These tags give you real-time information about the location of products, so you can instantly take stock of your business. When fulfilling orders using mobile solutions in the warehouse, your system updates automatically, giving you the information you need to make more informed business decisions.
Hoarding goods probably doesn’t make sense during an economic slowdown. But you can’t always reduce inventory to the bare minimum either if you want to deliver a positive customer experience. You must find the proper balance of inventory management that takes into account the current conditions and challenges in your market. Therefore, it’s prudent to continually assess the situation before choosing the right inventory strategy during a recession.