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Two of apparel retail's biggest concerns today are often attached at the hip—inventory management and liquidity—as decisions made in the former will almost inevitably impact the latter. This reality intensified during the Covid-19 pandemic as retailers frantically canceled orders amid plummeting demand and have since avoided acquiring new inventory to protect their balance sheets.
Across the board, inventory levels are down. In a recent Sourcing Journal webinar, Derek Binns, vice president of sales, Europe at international trade financing services provider Tradewind Finance, said that clients' inventories in 2021 have declined as much as 26 percent year over year.
"The ones who weren't so lucky in liquidating their inventory to raise cash are likely having the balance sheet crisis that forced them to restructure," said Mark Cohen, director of retail studies at Columbia Business School.
As apparel retailers look to finance their businesses in the wake of these inventory issues, even those in a decent position have money tied up in inventory carried over from last season. Now, many are encountering a new problem. Traditional banks might not be as open to providing the financing necessary to get these firms back on their feet. One reason is, they lack the expertise to understand the specific challenges of this industry, Binns said.
Businesses like Tradewind Finance fill that gap with supply chain finance tools.
"Supply chain finance is one of those umbrella terms, which covers a range of working capital generating funding solutions… [it's] known as reverse factoring," he said. "Supply chain finance is reverse factoring because in the normal way of things you would look at the supplier's creditworthiness. And as most suppliers, tend to be small or medium enterprises or mid cap and the buyers tend to be bigger retail enterprises. It's better to look at the creditworthiness of the end buyer for all concerned and leverage that."
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It's a "tailor-made" approach to what an individual business needs, and what its portfolio of debtors and buyers looks like, in order to provide the necessary working capital to restock their shelves and build better supplier relationships.
By giving suppliers access to this financing, buyers can reduce the risk of disruption in their supply chains and strengthen their supplier relationships, while also improving their own working capital position.
Inventory is cash, so treat it as such
With the benefit of more working capital across the supply chain, retailers then free up a bigger opportunity to make necessary investments in technology and analytics to better understand their inventory positioning. But even with the extra funding, inventory is not something retailers should take for granted, especially coming out of the pandemic.
"When business is good, people get careless regarding inventory bills and inventory productivity," Cohen said. "It's always a crisis at some point and a subject of lost performance. People hide behind the precept that they don't want to lose a sale or lose the customer…but in the cold, hard light of day, inventory is cash. It's typically the largest asset on their balance sheet, and they have to treat it as an extraordinarily dear and fragile asset."
This makes it all the more pivotal for retailers to optimize planning for future inventory needs. Abby Jenkins, product marketing manager for NetSuite, highlighted that overstocks and stockouts are the symptoms, but not the actual problems that retailers face.
"[The problem] is not being able to understand what you historically were selling. It's not being able to understand seasonality within your business and what that looks like, or what kind of promotions you historically ran so you can properly forecast what your demand is going to be in the future," Jenkins said.
That's particularly challenging coming off of 2020, which was an anomaly and Jenkins said fractured systems that house critical data in different places is an ongoing hindrance to understand sales history.
"You need to have a system that's going to meet you, as a business where you are and where you are today but then also where you're going," Jenkins said, adding that's not Quickbooks, especially beyond a retailers' infancy. "You're going to get to a point where you need something that's able to show you what your inventory is across all of your locations across all of your channels and down to the individual store level to… transfer inventory between locations or fulfill from different locations depending on where the sales came from and where it's going."
Watch the webinar to learn more about:
The differences in retailers that have managed inventory well versus poorly
Reducing carrying costs and minimizing obsolete inventory
Avoiding the safety stock conundrum
The role of supply chain diversification in mitigating inventory issues on the road ahead
Leveraging inventory data to help generate working capital
Overcoming the reluctance retailers have in adopting new inventory visibility technology
Click here to watch the webinar now.
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