Our world has been dominated by tariff and trade conversations, but much like everything we’ve been through in the past—trade issues, global unrest, pandemics—it’s a matter of responsiveness and adaptability. Responsiveness to quickly identify when you are “off plan,” and adaptability to address and recover.
Sean Elliott
As in the past, a lack of adaptability regarding inventory can put supply chain leaders in a difficult situation, leaving warehouses overflowing with stock. At the same time, store shelves sit empty or are stocked with the wrong products. Reading the situation wrong costs billions in lost sales, markdowns, and operational waste.
With uncertainty guaranteed to continue for the foreseeable future, there’s one problem supply chain managers can actually control right now: the critical balance between volume and location.
Many companies struggle with this balance because they aren’t getting the right products at the right time, or at the right price, which can lead to an unhealthy inventory. Strategic sourcing drives decisions that may decrease lead time (and reduce safety stock) with an increased price because it optimizes risk and capital positioning.
The goal for inventory management should be straight-forward,: minimize missed sales and maximize full-price sell-through with the lowest possible inventory levels. It seems simple, but it can be difficult to achieve.
The hidden cost of defensive overstocking
When global policies or inventory availability shift, the instinct is to buy in bulk and stockpile. It seems logical. By building a buffer, a company can protect against disruption. But it creates a different kind of crisis.
Inventory sitting in central warehouses doesn’t serve customers. It ties up working capital. It sits idle while stores run out of the exact products customers want to buy. This results in the worst outcomes, simultaneous overstock and stockouts.
Retailers are managing a larger number of pitfalls today, including:
- Tighter working capital constraints than ever due to higher interest rates and shifting consumer behaviors.
- Inventory-to-sales ratios at record highs.
- Misallocating stock or relying on heavy markdowns to clear excess inventory erodes margins and working capital.
- High markdowns and frequent promotions reduce profitability. Availability gaps and poor responsiveness to demand hurt the bottom line and customer sentiment.
Once inventory is allocated incorrectly to stores, retailers are forced to use increasing discounts to clear slow sellers. Even the highest markdowns often fail to move it all.
Why flexibility beats redundancy
Bulk buying and warehouse stockpiling create more problems than they solve. Why? Redundancy is static. Flexibility is dynamic.
Consumers demand variety. Trends shift rapidly. SKU counts are skyrocketing. Traditional inventory segmentation approaches group SKU-locations into one-size-fits-all logic. Every item in a segment gets the same service level target. The result is that inventory mixes are wrong.
Why are SKUs still a problem?
- As many as 75% of companies still use spreadsheets to optimize their inventories. These approximations can’t handle the relationships between average inventory and service levels for each SKU and location, account for cannibalization across the SKU mix as products are phased in and out of the stocking strategy, or define the optimal inventory mix across products and networks to meet service targets at the lowest cost.
- Many planners still rely on ABC inventory classification because it’s been around for decades. But what worked in simpler supply chains no longer works in today’s uncertain landscape. ABC classification is too simplistic for today’s complexity, leaving significant opportunities for improvement on both the top and bottom line.
- Many assume that increasing inventory is necessary to improve sales and avoid stockouts. But the opposite is often true. Businesses that get inventory optimization right can boost service levels by 3-5% while reducing overall inventory by 15-30%. Flexibility in allocation beats redundancy in volume every time.
Solving problems with agility
To thrive amid market uncertainty, companies must react quickly and adjust to real-time demand fluctuations. This isn’t about forecasting better. It’s about responding faster.
Machine learning has advanced traditional forecasting by analyzing internal demand signals and incorporating external data. This delivers more accurate demand forecasts and better inventory planning. However, the real advantage comes from understanding the range of possible outcomes with their probability of occurrence. There needs to be a system to manage the risk of demand volatility as a whole, not just predict a single outcome.
Real-time demand signals allow for dynamic allocation, respond to what customers actually want, and move products responsively to meet that demand. This fosters a customer-centric approach, creating a personalized store experience for each customer.
This approach holds throughout most types of uncertainty. It’s not about betting on stability. Instead the focus is on a system that is designed to address instability. Having infrastructure in place that responds dynamically to these challenges will help maintain profitability no matter the circumstances.
A practical framework
Here’s how to build adaptive inventory networks that respond to disruption without drowning in excess stock:
- Eliminate one-size-fits-all segmentation. Understand the unique characteristics of each SKU-location combination. Different products need different service levels, and different locations have different demand patterns. Treat them accordingly.
- Define the ideal inventory mix across the multi-echelon supply chain. Map out where inventory should sit to meet high service levels while minimizing total inventory and reducing costs. This requires understanding the relationships between average inventory and service levels for each SKU and location.
- Apply stock-to-service curves at the SKU-location level. Advanced inventory planning tools allow safety stock levels to be optimized with precision. Achieve higher service levels for critical products while reducing excess inventory for slow-moving and intermittent demand items.
- Improve product availability without overstocking. The goal is to reduce waste and excess holding costs while increasing working capital efficiency. It’s possible to balance profitability with customer service excellence; these aren’t competing objectives.
Build feedback loops that drive continuous improvement. Monitor what’s working, adjust what isn’t, and use data to refine the approach over time.
The reality is simple: inventory is worthless if it’s trapped in the wrong location while customers walk out of stores empty-handed. Volume without an agile location strategy is just expensive clutter.
Benefits of collaboration and sustainability
Success in supply chain management is built on collaboration, trust, and reliability. These values unite teams, partners, and customers in the pursuit of shared goals. By empowering teams and fostering a culture of continuous learning, organizations can adapt quickly and innovate with confidence. Listening to customers and valuing diverse perspectives ensures solutions remain relevant and impactful.
And while we don’t always consider our global footprint when planning our next move, organizations have the power to make decisions that benefit not only themselves but also society. Adaptive inventory strategies do more than optimize outcomes; they help reduce waste and support environmental sustainability. By prioritizing people, planet, and partnership, we create supply chains that deliver lasting value and positive impact beyond financial results.
Continued uncertainty
Uncertainty isn’t going away, nor are margin pressures or working capital constraints. The companies that succeed will be those that stop treating inventory as a static buffer and start treating it as a dynamic asset that flows to where it’s needed, when it’s needed.
The question isn’t whether there is enough inventory. It’s whether it’s in the right place.
About the author
Sean Elliott is the CEO of ToolsGroup. Sean brings a wealth of experience to our team, having previously served as the chief technology officer at Körber Supply Chain Software, and later as co-CEO, leading a global team of nearly 2,000 employees and generating $500M in revenue. Over his 17-year tenure at Körber Supply Chain Software, he held multiple leadership positions and spearheaded the development of innovative solutions to address the industry’s most complex challenges. Before joining Körber Supply Chain Software, Sean was the CTO at HighJump, a global supply chain software provider later acquired by Körber. He lives in Colorado with his wife Julie and three daughters daughters, and can often be found playing the drums or enjoying a live show.
