The real cost of inventory distortion, and how to reduce it

Every business that holds stock lives with two opposite risks: not having enough of the right product, and having too much of the wrong one. Together they are known as inventory distortion, and research shows the cost is far larger than most teams assume.

How big is the problem?

IHL Group's retail inventory distortion study estimated the global cost to retailers at about $1.77 trillion in 2023. Roughly $1.2 trillion came from out-of-stocks and about $562 billion from overstocks. In other words, missing products cost about twice as much as excess ones, but both drain profit.

The figures are for retail, but the same mechanics apply to distributors, wholesalers, manufacturers and multi-branch food networks: lost sales when the shelf is empty, and cash, space and shelf life wasted when it is too full.

Where distortion comes from

• Forecasts built on habit. Orders based on last month or gut feeling ignore seasonality, promotions and one-off spikes.
• One policy for every item. Fast movers and slow, erratic items are planned the same way, so some are always short and others always in excess.
• Disconnected steps. Demand planning, purchasing, shipments and warehouse decisions live in separate files and systems.
• No root cause. Teams see that stock is excess or critical, but not whether the cause was the forecast or supply fulfilment, so the same mistake repeats.
• Shelf life ignored. Perishable stock is ordered or allocated without considering expiry, turning overstock into write-offs.

Five practical steps to reduce it

1. Clean the demand signal. Separate real demand from noise such as promotions, one-off orders and stock-out gaps before forecasting.
2. Segment your portfolio. Use ABC-XYZ segmentation to give each group the right service level, review period and planning method.
3. Set stock targets from service levels. Calculate safety stock from demand variability and lead-time variability instead of fixed rules of thumb.
4. Connect planning to execution. Link the plan to purchase orders, shipment tracking and receipts, so delays are visible before they hit the shelf.
5. Explain every deviation. Attribute excess, critical and non-moving stock to its cause, and review ageing and near-expiry batches regularly.

Where OPTIAI fits

OPTIAI was designed around these steps: a governed demand forecast, service-level-driven stock targets, expiry-aware supply planning, procurement and shipment tracking in the same flow, and inventory control that explains the cause of every deviation. For networks that replenish many branches from a central warehouse, OPTIFLOW handles the daily replenishment and distribution plan.