Navigating Complexities: Challenges of Inventory Management in Consumer Electronics Retail Chains

global retail
  • Nov 6, 2023
  • 12 min read
Cover: Navigating Complexities: Challenges of Inventory Management in Consumer Electronics Retail Chains

According to Statista, the consumer electronics market revenue amounted to $1052 billion in 2023 and the market is expected to grow by 2.27% annually. The exciting development of the industry necessitates changes in inventory management, which is becoming an increasingly important part of business processes, especially in large networks.

Retailers face a number of challenges in planning their inventories and supply chains. Manual ordering, unbalanced inventory, lack of actual inventory data – are just some of the typical issues and tend to snowball. The results are lost sales, frozen capital, and high operating costs with a heavy load of routine tasks.

All these challenges are undoubtedly related to the specific features of consumer electronics distribution, which are the topic of this article as well as effective solutions that specialized inventory management software offer.

1. Large percentage of imported goods and long lead times

Consumer electronics retailers usually either work through distributors or take on the role of direct importers (mainly from China and other Asian countries with large production facilities and affordable prices). Large companies that have the resources to import equipment on their own face certain logistical challenges. For example, long supply chains significantly complicate the process of getting goods to their destination. Eacheach blender or vacuum cleaner encounters a variety of obstacles on the way: from clerical mistakes to global events such as pandemics or wars.

According to a survey by IPC, an electronics industry advocacy group, 69% of distributors have received warnings from their suppliers about delivery delays that average between 3 and 6 weeks. The domino effect of these delays has proven to be detrimental to the profits of many companies in the market.

The solution: Create long-term forecasts with regular updates and clear risk-based order planning.

Global world events are not something retailers and distributors can control, but they certainly can stabilize their interactions with suppliers. Since the electronics industry has long supply chains, forecasting should be done for a period of 3–6 months. For imports to work efficiently, suppliers should be provided with procurement plans, as most suppliers plan their production with that information in mind. For this planning to work effectively, the forecast must be highly accurate. The manufacturer can also be given a series of updates. For example, the LEAFIO Inventory Optimization automation system is able to update the forecast for six months in advance every month, which allows for high planning accuracy with regard to fluctuations in consumption demand.

<i>Long-term and medium-term forecasts</i>
Long-term and medium-term forecasts

In the LEAFIO system, long-term and medium-term forecasts allow you to accurately assess current and future needs for goods, taking into account the specifics of interaction with the supplier, the schedule of the arrival of goods, the season, and other factors. There is also a report for interaction with the supplier on forecasting, which simplifies the planning process. The report is visual and allows you to make the interaction process as convenient as possible. Even the most professional manager cannot keep such a large number of variables in mind, but it is a piece of cake for software.

2. High level of assortment rotation due to technology development

Markets characterized by a high rate of assortment turnover include fashion, toy retail, and consumer electronics. Modern electronics currently have a shorter life cycle than in the past. This is due to the fact that there are constant updates and improvements to the parameters, and new functionalities. In addition, having the latest models and new products available is a must for networks to preserve their competitive edge. 

In the electronics market, it is quite rare for completely new products or categories that cover new needs to appear. New arrivals are usually models with new functionalities. As a result, the same category role is filled with different products depending on the dynamics of technology development. 

In the past, retailers knew they had years to make a profit from electronic goods. Today, the life cycle of products such as microwaves or TVs ranges from 6 months to a year, depending on the category. If you don't sell the goods as planned, you will probably find yourself with warehouses bursting with outdated products. This is especially true for slow movers (those categories of goods that don’t sell every day). Some high-value refrigerators might wait for their buyer for weeks or even months and to keep a surplus of such models is to incur additional storage costs and risk not having sold all of them by the time a more modern and attractive model enters the market.

<i>Assortment in consumer electronics</i>
Assortment in consumer electronics

Due to the constant rotation of the assortment in consumer electronics chains, analogs and substitute products need to be systematically introduced. When a supplier introduces a new, modern coffee machine, the distributor must ensure a smooth transition from the old model to the new one. Retailers must prevent sales from dipping during these periods and stimulate demand for alternative products.

In terms of inventory management, putting together a wide and regularly updated assortment matrix with alternative families is a real challenge. You have to manage a large number of categories and SKUs that are interconnected and dependent on each other. Failing to identify such products leads to lost sales and large surpluses, which are just not cost-effective given the cost of storage.

Solution: Ensure high accuracy of orders and the formation of families of interrelated analog products, which will allow the store to gradually withdraw old models and replace them with new ones without the need to store excessive stock

LEAFIO Inventory Optimization, based on a multi-stage forecasting algorithm, allows you to accurately assess demand and calculate the required amount of inventory when managing supplies to all warehouses and stores of the chain.

The software also helps to gradually remove items of a product family from the supply chain and introduce a new product to replace it. The system's algorithms help to link products with product families that cover a certain category role in the assortment. The system automates the process of forming orders for goods combined into a family, taking into account the balances of the entire group. 

The LEAFIO Inventory Optimization solution can optimize and automate the processes of working with new and alternative products, and considering numerous variables. Most importantly, it saves time and money, which the retailer can use to address other important issues of business development and scaling.

3. Weekday related demand variation

Various factors such as seasonality, promotions, weekends and holidays cause changes in consumer demand patterns. In the consumer electronics segment, retailers also face demand fluctuations on weekends and weekdays. That is a fact that must be taken into account as deliveries to stores usually take place several times a week, especially if there are many outlets. Given the high cost of goods, maintaining a high level of availability of all categories on a regular basis is not always the best.

The volatility makes predicting what products and quantities will be needed in particular periods of time challenging and that sometimes leads to an excessive accumulation of goods in the warehouse, increased storage costs and losses due to inventory becoming obsolete. On the other hand, an insufficient amount of goods in the warehouse can alienate customers and reduce sales. Inventory management requires accurate methods and tools for demand planning as well as flexibility in responding to changes in demand.

Solution: Improve the accuracy of short-term forecasting based on previous sales.

To improve forecast accuracy, LEAFIO analyzes demand spikes throughout the week by calculating day-of-week coefficients for each individual SKU and storage location. The intra-week seasonality coefficients calculated by ML algorithms are especially helpful for retailers in the electronics industry: it allows them to maintain a higher inventory on weekends, when demand for electronics is always higher than on weekdays.

For instance, one of LEAFIO's customers, a large chain of electronics stores, delivers goods from a central warehouse on a daily basis. Thanks to accurate forecasting by day of the week, they are able to maintain the required level of inventory in accordance with the forecasted sales for a particular day of the week, and not order excess goods for periods with low demand.

Thus, the high forecast accuracy ensures that inventory meets current customer needs, reducing overstocks, freeing up frozen inventory, and reducing write-offs.

4. Omnichannel sales in consumer electronics networks

Although the vast majority of customers choose and buy consumer electronics offline, more and more customers are turning to online stores for their purchases every year. According to Statista, 30.6% of total revenue in the consumer electronics market will come from online sales in 2023. There is also a share of shoppers who choose products online and then go to an offline store: there they may choose another product or place an order online after checking it out in the store.

<i>Global consumer electronics market</i>
Global consumer electronics market

Such omnichannel sales require a variety of delivery options and complicate the inventory management process. In practice, it is not an easy task to manage such a complicated movement of goods. The retailer still has to record orders across all channels and maintain the availability of goods at an acceptable level both in warehouses and in stores. After all, if the desired SKU is out of stock and the customer cannot receive their goods in a timely manner, both sales and customer loyalty will be lost. 

Solution: Automate the ordering process and increase its accuracy by 10–30%, which will help ensure high availability of goods and increase customer loyalty.

The automation process can be implemented with the help of tools that use artificial intelligence to improve the accuracy of orders and demand forecasts across different sales channels. For example, LEAFIO calculates how many SKUs to order according to your supplier's schedule, store location, lead time, and demand forecast.

The system analyzes demand at all levels of supply and automatically orders the goods at the right time. Even goods on order and show samples in stores are taken into account. For example, if a product receives a pre-order status, the system automatically records it and places an additional order.

5. Reserved goods and frozen capital

All store chains that allow placing reservations on goods face the problem of having a certain number of goods unavailable for sale but not yet sold. This is frozen capital, when funds are invested in goods without generating profit. This problem becomes especially relevant in the context of volatile demand, when goods remain in the warehouse for longer periods of time, waiting for their buyer.

Frozen capital affects the company's financials. Money that could be invested in other promising assets or business improvements remains unavailable. In addition, it can lead to increased costs for storage and maintenance of goods, as well as the risk of inventory depreciation.

Solution: Develop a tailored strategy for working with reserved goods that accounts for volatile demand and maximizes capital turnover.

Such a strategy may include improving demand forecasting systems, developing flexible supply models, and actively removing obsolete or slow-moving items from inventory.

The LEAFIO Inventory Optimization solution provides several options for working with reserved goods, the choice of which depends on the specifics of business processes in the network. If there are certain reserved products, you can enter the data into the system, which will automatically add this quantity to the next order outside of the regular need. It is also possible to reserve a product for a customer in a central warehouse so that it is not automatically distributed across the network.

In addition, LEAFIO always takes a holistic approach to improving its customers' business. At the first stage of implementation, the team analyzes the existing processes in detail and provides recommendations on how to customize and improve the efficiency of business processes. If there is a pre-existing reservation system, we take a process approach to this issue, setting up business processes in the reservation so that they are properly coordinated with the replenishment of goods.

6. Various promotion types and mechanics

Consumer electronics chains are active in promotional activities, often tailored to new products in their assortments. Advertising campaigns overlap and are supported by various means, from in-store displays to TV commercials and billboards. At the same time, the suppliers themselves advertise their products for sale in the chain's stores without the retailer's direct involvement. The variety and large number of advertising campaigns complicates the process of controlling the company's promotional activities. The larger the chain, the more difficult it is to collect reliable information on all promotional channels. However, having accurate data is the key to correctly analyzing campaign effectiveness and planning purchases based on it. Problems with data quality can lead to incorrect assessment of results and forecasting errors. This may result in the procurement department not providing enough goods or, conversely, in a significant excess of stock at the end of the campaign.

The solution: Systematize promotion campaigns, track the effectiveness of each campaign individually, and make clear forecasts based on the data.

Retailers can put current and future promotions in order using the following functions of the inventory management automation system:

  • sales forecasting to create a plan for advertising campaigns;
  • calculation of the exact time of ordering at each point of the network to prepare for the start of the promotion;
  • distribution of promotions by type and evaluation of the effectiveness of each type separately;
  • fast and high-quality replenishment of stocks during promotional sales;
  • efficient conduct and completion of promotions in accordance with the chosen strategy.
<i>LEAFIO Promotion Intelligence</i>
LEAFIO Promotion Intelligence

Thanks to the promotional activity control system, all promotions can be conveniently managed at the same time. Thus, the LEAFIO Promotion Intelligence solution provides a convenient promotional calendar with all past, current and future promotions, as well as key promotional indicators. The system allows you to divide promotions by type and mechanics and analyze them separately without confusion. Employees can clearly see for which products and categories the promotions are valid, which campaigns are carried out in combination with the supplier, and how the advertisement is delivered to the user.

Consumer electronics retailers' inventory management automation is a stage of business evolution driven by the rapid development of the industry and its specifics. The use of specialized software helps to reduce the influence of the human factor, allows you to maintain availability and increase the turnover of goods, and control the level of stocks at the optimal level, regardless of internal and external factors.

According to the Auburn University RFID Lab, the average inventory accuracy level for retailers in the United States is 65%. Increasing this figure by even just 3% results in an overall increase in sales of 1%. If a store improves its accuracy to 93% using a specialized system, the gross sales can go up by 9% without the need for any additional investment.

The results of more than 100 projects are clear, using the specialized LEAFIO Inventory Optimization solution achieves the following results: 8% increase in sales, 50% reduction in overstock, 30% increase in turnover, and 50% reduction in lost sales.

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