How to bust the Ghost Economy costing you $1.75 Trillion

01

Introduction

Your business is haunted.

The blood-curdling scream piercing your business will come from you. It’ll be the result of something gone terribly wrong. Fear will overwhelm. Horror will race through your extremities. A spine-chilling terror will envelop you. The unnerving discovery will leave you in a state of paralysis. You’ll be face-to-face with the treacherous monster but unable to do anything to protect yourself. The destruction will cut you to your core.

The harm will be potentially fatal.

You’ll be spooked.

Sincerely caught off guard.

The maddening revelation you uncover - but only after it’s too late - will have gone unseen until this startling moment. It has been hiding just slightly out of plain sight all along though - lurking in the background, around the corner, or underneath that which you pay little attention.

Your inventory management is haunted.

Getting rid of the ghost - the one robbing you blind - requires seeing it first. Only then - if you have the courage - can you unhaunt your business, bust the ghost for good, and claw back the trillions of dollars it’s costing you and your business peers.

02

What is the ghost economy

The ghost economy defined.

You’re losing the equivalent of 11.7% of sales every year but not even noticing. The majority of this loss goes unseen. It’s largely invisible to you and the businesses around the globe that combined are being swindled out of $1.75 trillion a year.

Even worse, the majority of these losses are preventable.

The culprit is the ghost economy, which is defined as the largely hidden cost associated with overstocks, out-of-stocks and preventable returns. Despite worldwide retail sales that are forecast to grow in the mid-single digits through 2020, significant operational inefficiencies exist and are coalescing to cost you:

These are the sum total of lost sales or money left on the table that add up to nearly 12% of sales for the typical business. The ghost economy can also drive up costs and make you less profitable. Consider the matter of preventable returns.

It takes nearly 28% of businesses approximately two weeks to add a returned item back into inventory where it can then be resold. It takes 5.9% of businesses more than four weeks to do so.

The lag can have a negative impact on your inventory turnover ratio, increase inventory carrying and reverse logistics costs, and severely crimp profit margins. This is a ghost that does more than scare - it can kill.

03

The ghost economy’s impact

Calculating how much the ghost steals from you.

To kill the ghost you first have to see it. It can be easy to get caught up measuring your business against vanity metrics or focusing solely on marketing, advertising and sales numbers. However, it’s the key performance indicators to which you aren’t paying attention that will sneak up and scare you out of business.

Calculating exactly how much the ghost economy is costing your business certainly won’t be pleasant. Tallying the total over the number of years you’ve been in business will be downright scary.

However, doing so will serve as a strong motivator to bust the ghost once and for all. The three primary components of the ghost economy - and how to calculate their financial impact on you - are as follows:

Overstocks

This is inventory that cannot be sold, sold at a profit, or at a price point that does not meet your return targets. Overstocks according to IHL, account for 3.2% of the revenue a business loses due to the ghost economy. Overstocks may also be responsible for inflating warehouse costs as research suggests slow moving inventory takes up 16.6% of all distribution center space.

The costs associated with overstocks are even higher when you factor in borrowing costs and the premium paid to insure excess inventory. Overstocks often result in poor cash flow, higher advertising costs, and lower operating margins. Discover how to calculate the amount overstocks are costing you with this equation:

Out-of-stocks

Running out or not possessing inventory the customer would otherwise have purchased had it been in stock. Out-of-stocks according to IHL, account for 4.1% of the revenue a business loses due to the ghost economy. Stockouts can also drive up fulfillment costs in the event a customer is willing to backorder an item.

Conversely, a backorder that is cancelled can also drive up costs and lead to higher raw material costs or even an overstocked situation should you not be able to sell the cancelled order to another customer at full price.

Discover how to calculate the amount stockouts are costing your business with this formula:

Returns

Of particular concern are preventable returns caused by inventory management or fulfillment errors, many of which cannot be resold at full price. Returns according to IHL, account for 4.4% of the revenue a business loses due to the ghost economy. Worldwide the cost of returning merchandise is more than $640 billion.

Especially alarming is that returns stemming from businesses who ship customers the wrong item costs nearly $100 billion a year in reverse logistics. Even worse, at least 49% of businesses offer free return shipping which erodes margins further.

Importantly, many are underestimating their real return rate because they calculate their return rates incorrectly, in part, by not factoring in exchanges. Discover how to calculate your real return rate with this formula:

If you’re interested in how you stack up versus the average business, total the three calculations and divide the number by your annual sales and you’ll have a figure you can compare against the average- which as a reminder is 11.7%. But these are just the costs you can actually calculate when your business is haunted.

The ghost’s impact on customer loyalty

It all makes perfect sense. At least in theory. You can achieve significant efficiencies by transforming your business into a lean company or implementing just-in-time inventory that pulls just enough inventory, at just the right time, and leaves no glut or waste.

Specifically, lean businesses reduce inventory obsolescence, minimize carrying costs, and increase margins. But being too cute with inventory can cause customers to turn on you.

Stockouts & loyalty

The downside of limiting inventory risk increases the risk of stockouts. In fact research suggests that stockouts - especially repeated stockouts - can reduce customer loyalty and cause customers to switch to a competing brand.

The switch by customers victimized by repeated stockouts is also more likely to be permanent as the research indicates reliability is a key factor in customer loyalty.

Likewise, additional research indicates that while just 30% of consumers say a stockout hurts the shopping experience, 70% experiencing a stockout for a third time will not buy from you or plan to switch brands.

Returns & loyalty

Loyalty is also impacted by returns as 88% of consumers say the ease with which they can make returns is a key factor in determining where they shop. It’s even harder to maintain loyalty in the ghost economy when you consider that 67% of shoppers check a brand’s return policy before purchasing and 58% aren’t satisfied with the ease of making returns.

With customer loyalty, according to research, already being pressured by commoditization, globalization and market saturation in developed countries and 89-percent of marketers citing customer experience as their primary differentiator - the ghost economy is costing businesses trillions and even worse, their customers.

To keep from scaring your customers away… You must first identify the invisible weapon the ghost is using to cleave your business.

04

Exposed: How the ghost operates

Inside the ghost’s toolbox.

What’s driving the ghost ravaging your business? The known culprits - defective merchandise, return fraud, and sizing issues - are relatively easy to see and likely top of mind. However, it’s largely what you don’t see - or the tools you lack - that are responsible for much of what the ghost economy is swiping from you:

When looked at with overstocks and stockouts, the estimated annual loss is more than $1.1 trillion due to what’s known as inventory distortion. Having a distorted view of inventory means you lack the visibility necessary to make data informed decisions, the insight required to optimize inventory management, and the tools necessary to automate much of this work.

The increased complexity of managing orders, inventory, and fulfillment across a supply chain designed to execute a multichannel global growth strategy only increases the risk. The tools the ghost uses - inventory opacity, inaccurate or nonexistent demand forecasts, and a lack of automation - work in tandem to thwart multichannel fulfillment in the following ways:

To unhaunt your business, you need sophisticated tools more powerful than the ghost’s.

05

How to transform your business

Becoming a ghostbuster.

The ghost is a master at distracting you from the real problem. While you undoubtedly agree that inventory distortion - stockouts, overstocks, and inefficient returns - are problems, they’re not the real problem. It may sound counterintuitive - or even absurd - but losing sales and customers isn’t your problem either.

The real problem is you aren’t positioned to keep the promises you make. If you’re struggling with the ghost economy you lack the infrastructure necessary to seamlessly execute in both the digital and physical worlds simultaneously. The promises you make in one world must immediately be translated into language understood by the other. It’s the only way to successfully execute in a multichannel, multi-location business environment.

To transform at scale you must solve problems of scale. Transforming your business to combat the ghost economy - and solve the real problem - first requires that you identify transformative objectives. But you’re wrong if you believe avoiding stockouts, overstocks, and preventable returns are the right objectives.

These are no more than symptoms of the haunting. Instead, focus on objectives that will not only alleviate symptoms but also transform your business tomorrow and beyond by mastering inventory management:

Objectives like these position you to solve a business problem with technology. Digitally transforming your business - a key differentiator of top performing eCommerce companies - starts by optimizing a highly efficient, smart, and responsive supply chain you can use to offer a best-inclass customer experience that differentiates your brand.

Gaining visibility into your business - which nearly half of your competitors have already achieved - results in deep insight and innovative new opportunities that allow you to control your destiny. You’ll no longer be hostage to inefficiency, inventory distortion, or the ghost economy.

Transform your business - by mastering inventory management - with the following three key ghostbusting tools.

Three ghostbusting tools

It’s complicated! That’s one way to describe your relationship with inventory. Besides stashing inventory into multiple locations - distribution centers, store shelves, or trucks - fulfilling multichannel orders efficiently requires two things:

1. Knowing in real-time where your inventory is located, in what quantities, and accurately forecast future demand
2. The ability to automatically replenish inventory, route it intelligently, and communicate with customers, vendors, 3PLs, and channel partners

Enhancing your inventory visibility better positions you to optimize order and inventory management, leverage your supply chain as a competitive advantage, and offer a unique and compelling customer experience that yields lasting customer loyalty. You can’t fix - or successfully operate - what you can’t see.

To fix your inventory issues - and kill the ghost once and for all - it’s imperative that you gain inventory visibility. Only after you’ve acquired visibility will you be able to streamline operations, execute faster and more efficiently, and scale rapidly.

Use the following three ghostbusting tools to break free from the ghost economy, master inventory management, and take control of your business future:

06

Conclusion

Scaring the ghost away.

The ghost is terrified of what you’ll do next. No matter how much it cost you in the past, the ghost economy no longer has the power to take another dollar from you unless you allow it. You have the power - and access to the tools - to kill the ghost economy for good.

When you master inventory management you master the ghost. The ghost relies on dark, shadowy, and opaque parts of your business for hiding spots. When you flood your business with the glaring spotlight that is inventory management, the ghost has no place to hide or haunt.

With real-time stock visibility, the insight necessary to make faster data informed decisions, and the power of supply chain automation - you give your business the power to thrive rather than worry what’s around the corner.

Boo! You’re one step from scaring the ghost away for good.