Though it’s been months since the West Coast port disputes were in the headlines, retailers are still struggling to return inventory levels back to normal after the incident and an abnormally long, cold winter resulted in serious supply chain and inventory disruptions. When asked recently about the strikes’ lingering impacts,Trevor Edwards, president of Nike Brand said: “We do expect it will take a few quarters to return to fully normalized product flow.”
While many retailers are turning to in-store sales to reduce excess inventory, this approach can have serious negative implications. Despite being able to use existing distribution channels to move their goods, albeit at reduced pricing, retailers may find that in-store sales lower future revenue by reducing the shelf space and time available to sell next season's merchandise. Consequently, the in-store sales route is a relatively slow method for getting inventory levels back on track.
For retailers who want to return to "normal" more quickly, there are other options, namely liquidation and corporate trade, which are worth considering. These alternatives offer different benefits, so selecting the one that is right for your company will depend on your current position and long-term goals.
Liquidation involves selling off inventory quickly, typically at a lower cost than what was paid for it. Companies dispose of assets through their established distribution channels at greatly reduced prices or sell entire inventories to a liquidator, who immediately takes possession of the inventory.
Retailers frequently use liquidation because it can generate cash quickly – something that companies with excess inventory often desire. Additionally, it is currently the most accepted method of handling excess inventory, so it has been incorporated into most companies’ supply chain strategy.
Liquidation does have some significant drawbacks, though. Since inventory is typically sold for pennies on the dollar of its original cost, retailers must take a significant financial loss on their books, which may hurt investor confidence. Furthermore, until the excess inventory is offloaded, companies have to use warehouse space to store the inventory, space that cannot be used to stock upcoming seasonal merchandise.
With corporate trade, a company’s excess inventory is purchased with cash, trade credits, or a combination of both. In return, the retailer agrees to make certain business expenditures through the corporate trade company, using the trade credit as partial payment. Payment to the retailer is typically equal to the acquisition price of the assets, enabling retailers to receive more value for their product than they would by using either in-store discounts or liquidation. Services retailers can purchase from their corporate trade partner often include media, retail marketing, travel & events, freight & logistics, and lighting.
Corporate trade companies often sell inventory they acquire to the same distribution channels that the retailer has in place, reducing supply chain disruptions. Additionally, since corporate trade companies typically work with companies across multiple categories, they can provide access to alternative distribution channels, which may otherwise be inaccessible to retailers.
Since retailers must agree to make business expenditures through the corporate trade company using trade credits as partial payment, it is imperative for them to understand what services are offered through the corporate trade firm.
Retailers should understand the caliber of the corporate trade company’s trading inventory, as well, and have the ability to involve other parts of its organization that can leverage these services. This is key for achieving the full potential that corporate trade offers. It is only when trade credits are used, that corporate trade’s full value is achieved.
Provided retailers are comfortable with purchasing select business services through the corporate trade company, corporate trade can provide flexible solutions to meet most retailers’ needs.
Choosing Between Liquidation and Corporate Trade
While liquidation is straightforward and already widely used, its financial benefit, while immediate, is limited. Corporate trade, on the other hand, can deliver enhanced financial benefits and added value for excess inventory. Depending on how the trade is structured, some of these benefits may be achieved over time versus immediately. Cross department planning and collaboration is essential to realizing the full value of corporate trade long term.
While supply chain and inventory disruptions will never go away, there are multiple options for retailers to manage the revenue and inventory impact these events create. Companies, however, must be strategic and proactive in identifying the right solution for them. Answering questions such as “Is there a short-term cash need?” and “Do we need to expand our distribution channels?” will help determine which solution is right for you to ensure you restore as much value as possible from your excess inventory.