What leads to distressed inventory (and who’s on the hook to fix it)?

Minimizing (and then managing) excess and distressed inventory can be an extremely challenging task. Layer in potentially dozens of influencing factors from all over the business, and it can be quite the undertaking to simply pinpoint the root causes for these overages, not to mention identify what teams are responsible for remedying them. So let’s take a look at some of the most common causes that we see creating distressed inventory, and how you can begin to address them.

Causes throughout the business

Before we dive in, let’s first acknowledge that there are plenty of factors that are unpredictable and arise from external factors out of a manufacturer’s control, such as inflation, emerging tariffs, war, and weather patterns. While there are opportunities to get ahead of these forces and their impact on distressed inventory levels, we’re going to focus primarily on the internal business factors and common causes over which you have more direct influence and control.

Supply chain problems

Numerous problems can arise in the ever-complicated supply chain. On the production side, throughput and inventory availability can be impacted by a lack of ingredients, machinery limitations, or labor challenges. Logistics problems can also cause slowdowns; routing errors, driver shortages, and stock lost (or stuck) in transit all impact deliverability. 

In both these cases, slow production and delivery can lead to a bullwhip effect, in which overproduction follows in order to make up for the shortcomings. As a result, overproduction creates excess inventory, which will eventually become distressed.

Technical errors and data transcription mistakes can also generate problems. One common mistake that we see is item mapping errors, in which batch-level (and associated shelf life) information is not accurately tracked in various ERP and WMS platforms, nor reflected when picked by warehouse workers when it comes time for delivery.

Product lifecycle and innovation challenges

Overages and obsolescence also creep in through the standard lifecycle of a product. For example, product innovation and eventual SKU discontinuation are both natural parts of the CPG industry’s go-to-market process, but can leave discontinued inventory in distribution centers. 

In other cases, decisions to change packaging and/or promote new branding will often result in seeing grocery retailers not wanting to keep the older stuff on their shelves. These types of customer stock returns can be difficult to predict (especially without visibility into how your customers are managing their own inventory).

Business decisions

Evolving business priorities (ranging from where marketing or promotional dollars are being allocated, to shifting omni-channel distribution) can introduce curve balls into forecasting efforts. These are decisions often being made at an executive level that might not be affording team members at a tactical level adequate time to adjust. 

When forecasts change without providing sufficient notice to manufacturing, logistics, and sales departments, the company can be left with excess inventory and limited windows of opportunity to remedy. 

Identifying responsibility

When distressed inventory does occur, It’s important to identify who’s responsible - both in terms of its creation and remediation. This is not to place blame or find a scapegoat; rather, it’s to afford companies positive feedback loops for A) preventing in the future, B) identifying clear steps to correct, and C) highlighting process and platform changes needed to address cross-functional communication challenges.

In our experience, CPG manufacturers tend to group these segment responsibilities under a handful of teams: Supply Planning & Manufacturing, Demand Planning & Commercial, and Operations & Logistics.

Supply Planning & Manufacturing

The Supply Planning & Manufacturing teams have arguably the highest levels of responsibility when it comes to distressed inventory. Overproduction is probably the most common manufacturing-related issue that we see creating excess inventory, and this often emerges from forecasting calculations and ingredient or packaging purchases from the Supply Planning team. Manufacturing also owns the opposite problem – production cycle constraints, stemming from - among other things - recipe constraints from unavailable ingredients. This can create instability or inconsistency in the supply levels. When these overages occur, shelf life expiry is commonly assigned to these teams, too.

Demand Planning & Commercial

The Demand Planning & Commercial teams - which include brand managers, demand planners, marketers and sales teams - often own a large part of the responsibility when it comes to distressed inventory. This is where we see many of the business decisions arise that have impacts on the rest of the supply chain. For example, both promotional items and product discontinuations are business-level decisions outside the hands of the manufacturing, logistics, and supply chain teams. For that reason, commercial teams need to ensure they’re communicating these decisions with an adequate amount of lead time for their colleagues to react.

Similarly, many organizations that we speak to assign distressed inventory from customer returns to the Commercial team, as it’s most often their policies and practices (such as customer guarantee date negotiations or allowances) that create these challenges.

Operations & Logistics

The Logistics team is responsible for many of the items you would expect related to fulfillment and distribution. Problems such as inventory lost in transit, misdelivered, or delayed by transportation constraints fall to logistics for pretty obvious reasons.

Other Operations-related challenges and fixes often involve warehousing processes and procedures. Responsibilities can include relabeling or repackaging SKUs, dealing with damaged inventory, or introducing new corrective actions for shelf-life constraints, such as inventory rotations, training, or adjustments to FIFO/FEFO procedures.

Addressing the challenges

In order to resolve some of these complex challenges, CPG teams have to focus on acting as a team. To start, that means improving internal communications. Whether that’s a more regular meeting cadence internally or a new communications platform, the more that different departments are talking to each other, the less likely there are to be mistakes. Adding reliable inventory data to the conversation can also help make things clearer, so ensuring that you have a system with robust reporting is key. Digitizing your processes can minimize technical errors, increase speed to market, and give better visibility throughout the organization. 

To some degree, excess inventory is inevitable. But by recognizing its causes and which departments are responsible, you can more accurately plug holes in your process and deliver better results.

For more on identifying the common challenges causing distressed inventory, download our white paper, 7 Truths About Excess Inventory in CPG.