There are too many things in the world

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After the famine flood. The last two years have been clouded shortage of supplies– with retailers just in time struggling to send their products, electronics manufacturers are looking down lack of computer chipsas well as supermarkets are struggling to fill their shelves. Now some retailers are grappling with the opposite problem: a flood of things no one wants to buy.

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Some of the largest retailers in the United States are almost $45 billion in surplus inventory, according to Bloomberg, up 26 percent from a year earlier. This is the result of retailers struggling to avoid the shortages that marked the start of the pandemic, and then failing to anticipate the slowdown in consumer goods spending as the world reopens. Now, in an effort to change volumes and cut losses, companies like Target, Gap, and Walmart are relying on deep price cuts.

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Many retailers are facing the challenge that Amazon faced in its recent first quarter results: Caught off guard when Covid hit, they were planning for increased demand that just didn’t materialize. For Amazon, this meant excess free storage space. For others, it’s the opposite problem: too many things and not enough space to store or sell them.

Costco has a stock of Christmas-themed items that didn’t arrive in time for the last holiday period and plan to put them on shelves this year, but prices for other items, including widescreen TVs popular during the lockdown, are likely , will grow. fall. Meanwhile, those pajamas that countless column inches we devoted to in the early stages of the pandemic are now likely to be discounted, along with other leisure wear that will be in vogue during the lockdown.

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“It really starts with a pandemic,” says Lisa Ellram, distinguished professor of supply chain management at the University of Miami, Ohio. “The retailers didn’t know what to do.” Between February and March 2020, retail sales dropped sharply. 9 percent in the US, falling another 15 percent a month later. But by June 2020, retail sales were back to pre-pandemic levels and have continued to rise ever since. “Things really took off — and they couldn’t keep up with demand because people stopped buying something, and then all of a sudden they wanted something,” Ellram says. “All of these strange and unexpected shifts in demand have taken many businesses by surprise.”

These shifts in demand coincided with some of the worst supply chain disruptions in recent history. “People had purchasing power and couldn’t buy many of the services they normally consume, so they bought goods,” says Mark Levinson, author of two books on shipping containers. Levinson was one of them: he bought a sofa and then waited nine months for it to be delivered as Covid outbreaks closed Chinese ports and the Suez Canal through which 12 percent of world trade iswas blocked on a very large boat.

As delays and disruptions became the norm, companies sought to avoid future shortages by purchasing excess inventory and holding inventory in place rather than relying on an increasingly fracturing just-in-time supply chain. Others have invested heavily to completely overhaul the supply chain. Intel, for example, said it would build the 20 billionth Chip plant in Ohio to alleviate shortages due to the supply chain.

Problems throughout the supply chain are exacerbated by what Ellram calls phantom demand: Faced with long lead times for essential goods, people often overorder. Someone could put a deposit on sofas at three retailers and see which one arrives first, then cancel the other two orders. “Manufacturers were getting fake signals about true demand,” she says.

There was also an opinion that the pandemic was approaching its final phase. “Retailers, hoping for a recovery, went out and ordered a lot of goods,” says Enda Breslin of ShipBob, a global order fulfillment firm.

But there was a more important problem: the world was changing. Pandemic restrictions have eased and retailers have forgotten that product spending was only part of the equation, all of which is causing headaches for businesses that have spent the last year trying to prepare for a demand model similar to summer 2020 and avoid summer 2021 disasters by realizing that summer 2022 is completely different from both. “That’s what retailers and manufacturers are trying to deal with,” says Levinson. “Many of them bought because they didn’t want to disappoint their customers with empty shelves.” Now they have too many things.

The quickest way to unravel this mess is to break the cycle of feasting and starvation, but that’s easier said than done. The economy is a mess, consumer spending is unpredictable, and the war in Ukraine continues. “We just can’t handle that kind of instability,” says Ellram. She says the pendulum will remain out of whack, but over or under orders will gradually slow down as companies moderate their overreaction to real economic and social changes. However, the falling global economy is still a big unknown.

This means that the problems of the last two years are likely to resound for some time, albeit at a lower level than before. If the closing of the Suez Canal and the shortage of chips were one perfect storm, Breslin says, the situation the world is now facing is a completely different storm. “Fuel prices have gone up,” he says. “The inflation rate has increased. People just don’t have as much discretionary spending, which means retailers need to start discounting.” Companies with fast-expiring summer inventory face a conundrum: spend money on a limited inventory market to hold onto next year, or take a hit to profits and sell on margins that are negligible or non-existent. Another equally nasty alternative is to sell shares in the secondary markets, where big discounters like TJ Maxx will grab them and sell them cheap.

The problem is especially relevant for large companies because of the way they buy. Small retailers are more likely to order smaller volumes of goods in a shorter time frame. But the sheer volume of products sold by large retailers means that their orders are placed well in advance with manufacturers, forcing them to forecast demand based on less reliable information.

When faced with overstocking, retailers are likely to cut back on orders—perhaps too much, resulting in stockouts—and then counteract by overordering, repeating the cycle with less error. “For the big guys, the definition of insanity is just to keep doing the same thing and expect different results,” says Breslin. “They are doomed to keep doing it.”

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