Overflowing warehouses put a strain on Danish companies’ bottom line

This article was first published in Danish SCM+Logistik.

“One way to deal with the challenges is a more systematic, intelligent and data-based approach to price reductions – also known as markdowns. The goal is to set a price that ensures that the company's products end up in the hands of consumers rather than at the incineration plant when seasonal products change or new products are introduced,” say Jon Hjort-Jørgensen and Simon Strandskov from PA Consulting.

Simon Strandskov is a PA expert in agile transformations and innovation processes, and Jon Hjort-Jørgensen is a PA expert in data strategy and advanced analytics.

External factors put pressure on inventory management

The two experts highlight that Danish companies face challenges from a number of external factors in connection with the sale and transport of goods. The challenge around the sales of goods arises from the huge volatility in consumer behaviour. This has been driven in particular by macroeconomic factors, including rising inflation, a possible recession and generally low consumer confidence, which overall place greater demands on companies' inventory management.

In addition, the transport of goods is seeing challenges from global supply chains. In recent years, both COVID-19 and the invasion of Ukraine have demonstrated what the temporary closure of ports, trade routes and national airspace mean for Danish companies' inventory management. With a potential conflict in the South China Sea and general regionalization of global security policy, uncertain supply lines are probably not just a passing phenomenon. These are probably the basics of the new environment.

Changing consumer behaviour and challenges with global supply chains have led to a significant accumulation of stock in the Danish retail industry. The industry's inventory is therefore at its highest level in more than 10 years.

“The full warehouses are a challenge in themselves due to greater external pressure for sustainability in sales and production of goods. Only a few years ago, H&M experienced a real reputational car crash in connection with the burning of unsold clothes. The challenge has not diminished since – a recent report on clothing waste from the Danish Consumer Council THINK shows that Danish clothing manufacturers throw away 677 tons of clothes every year. It is not only a sustainability challenge but also potential profits that are going up in smoke,” the two consultants say.

Markdown strategy falls short

In their work on markdowns, companies try to get a balance between securing a profitable margin on the one hand and releasing storage capacity that makes it possible to introduce customers to new products. In many companies, however, according to the two experts, markdowns today are either based on the individual employee's gut feeling, a total percentage discount (e.g. 30 percent January sales), or the price adjustment reflects local solutions, often handled in Excel. This type of solution is rarely systematic – neither in the approach to pricing nor in the subsequent accumulation of experience. This often leads to uncertainty about the results for the bottom line and therefore undermines structured inventory management.

“In addition, there is often a lack of a feedback loop for production and purchasing. In our experience, relatively few companies use data systematically to manage production and purchasing,” say Jon Hjort-Jørgensen and Simon Strandskov. As an alternative to the traditional approaches to markdowns, some companies have started to use a more data- and AI-based approach. A systematic, data-based markdown strategy helps to ensure the right price, at the right time for the individual product. It increases margins, clears inventory and ensures that new items can hit the shelves. A data-driven markdown strategy cannot prevent a new global pandemic or tensions in the South China Sea. But the approach supports companies in mitigating pressure on inventory management caused by changing consumer behaviour and supply chain challenges.

“For many Danish retail companies, an AI-based markdown strategy will be a significant change compared to the current approach. We have therefore put together five benchmarks based on our work to support the continued relevance of Danish retail companies in an increasingly data-driven world,” say the two experts.

1. AI algorithms ensure intelligent markdown across sales channels: With an AI-driven approach to markdown, you support early and systematic price reduction, so you clean up the inventory – and the goods end up in the hands of consumers.

2. Think big, start small, scale fast: Demonstrate the value for one product category or sales channel and wait to implement the moon landing type projects until the teething problems are solved.

3. Use common digital solutions rather than local Excel tables: Even in several larger companies, markdowns are recorded in local Excel tables rather than in a shared digital environment. A shared platform supports common direction and learning across the organisation.

4. Follow up, improve and make your success visible: To ensure the expected results and support continuous learning, it is crucial to follow up on the results and demonstrate the successes – both internally and externally.

5. Integrate experiences into manufacturing and purchasing: New insights from a data-driven markdown strategy may lead to a need to revisit your production and procurement processes. For example, can you see a need to scale down the production of specific products because overproduction suppressed profits on the last products sold. Do you recognise challenges with changing consumer behaviour, uncertainty in supply lines and greater demands on sustainability? So ask yourself if your profits should continue to go up in smoke, or if a more data-based markdown strategy could be a solution,” the consultants conclude.