47% of fashion executives cite inventory as top margin target in 2026

Inventory optimisation has emerged as the primary margin improvement lever for fashion executives in 2026, with 47% citing it as their top priority, according to the latest State of Fashion survey by The Business of Fashion and McKinsey. The focus reflects an industry-wide push to address persistent challenges of overstock, markdowns and working capital efficiency that have weighed on profitability across apparel and footwear sectors.

The emphasis on inventory management comes as fashion retailers navigate a more volatile demand environment, elevated input costs and increased pressure from investors to improve return on capital. Executives are turning to a combination of algorithmic forecasting, dynamic pricing tools and leaner supply chain models to extract margin gains from better stock discipline.

What inventory levers are fashion executives prioritising?

Industry practitioners are focusing on three core operational levers to optimise inventory performance: demand-driven allocation, algorithmic markdown management and safety stock reduction. Each addresses a distinct aspect of the inventory lifecycle, from initial purchase planning through to clearance.

Allocation systems that route products to stores and distribution centres based on granular demand signals have become central to reducing mismatch between supply and local customer preferences. These tools use historical sales data, regional trends and real-time sell-through rates to guide initial deployment and inter-store transfers. The goal is to maximise full-price sell-through by ensuring the right product reaches the right location before demand shifts.

Dynamic markdown engines represent a second critical lever. Rather than applying blanket discounts at fixed calendar intervals, these systems calculate optimal price reductions at the SKU and location level, balancing the objectives of clearing aged inventory whilst preserving margin. The approach allows retailers to respond faster to slow-moving items and avoid deeper, margin-eroding discounts later in the season.

Safety stock reduction has gained prominence as brands and retailers re-examine buffer inventory policies established during earlier supply chain disruptions. With lead times stabilising and forecasting models improving, many businesses are lowering safety stock thresholds to free up working capital without compromising service levels. This shift is particularly pronounced among fast-fashion and contemporary brands operating on shorter replenishment cycles.

Which technologies are enabling inventory optimisation?

Fashion companies are deploying a range of software systems to execute inventory strategies, with machine learning-based demand forecasting platforms at the core. These systems ingest data from point-of-sale systems, e-commerce platforms, warehouse management systems and external signals such as weather or social media trends to generate SKU-level demand predictions. Improved forecast accuracy directly reduces the risk of overbuying and the need for subsequent markdowns.

Integrated planning platforms that connect merchandising, allocation and replenishment functions are also seeing wider adoption. These tools allow planning teams to model buy quantities, simulate allocation scenarios and adjust replenishment parameters in a unified environment. The integration reduces manual handoffs and enables faster response to changing demand patterns during the season.

Real-time inventory visibility systems, which aggregate stock positions across stores, warehouses and in-transit shipments, underpin both allocation and markdown decisions. Without accurate, up-to-date inventory data, even sophisticated algorithms struggle to deliver results. Retailers are investing in radio-frequency identification tagging and cloud-based inventory management platforms to achieve the required visibility.

How much margin improvement can inventory optimisation deliver?

Industry research and practitioner experience suggest that disciplined inventory management can yield margin improvements in the range of 200 to 400 basis points. The gains come from a combination of higher full-price sell-through, reduced markdown rates and lower inventory carrying costs. For a mid-market apparel retailer operating on gross margins of 50% to 55%, such improvements represent a material uplift to operating profit.

The realisation of these gains depends on execution capability and organisational alignment. Successful implementations typically require investment in technology infrastructure, training for merchandising and planning teams and changes to performance incentives that reward inventory turnover alongside sales growth. Retailers that treat inventory optimisation as a multi-year transformation programme, rather than a point technology deployment, tend to achieve more sustained results.

What challenges do fashion companies face in executing inventory strategies?

Despite the clear business case, fashion executives encounter several obstacles in translating inventory optimisation ambitions into practice. Data quality remains a foundational issue, with inconsistent product attributes, incomplete sales histories and fragmented systems limiting the effectiveness of forecasting and allocation algorithms. Many legacy retailers are undertaking multi-year data cleansing and master data management initiatives to address these gaps.

Organisational resistance also features prominently. Buyers and merchandisers accustomed to intuition-driven decision-making may be reluctant to cede control to algorithmic recommendations, particularly when those recommendations conflict with established seasonal rhythms or vendor relationships. Change management and demonstrable early wins are critical to building trust in new systems.

Supply chain constraints present a third challenge. Inventory optimisation strategies that rely on frequent, smaller replenishment orders require suppliers and logistics partners capable of handling increased order frequency and shorter lead times. Not all vendor bases, particularly those reliant on distant offshore production, can accommodate these requirements without significant adjustments to manufacturing and shipping processes.

What does the focus on inventory signal about broader industry trends?

The prioritisation of inventory optimisation reflects a broader shift in fashion industry economics. After years in which growth was the dominant strategic imperative, executives are now placing greater weight on capital efficiency and profitability. This shift is driven by a combination of investor pressure, higher cost of capital and recognition that the post-pandemic demand surge has moderated.

The trend also signals maturation in the adoption of data-driven decision-making tools. A decade ago, algorithmic merchandising and allocation were largely confined to a handful of sophisticated players. Today, these capabilities are becoming table stakes for mid-market and premium brands seeking to compete effectively. The widening availability of cloud-based planning platforms and the growing pool of talent experienced in retail analytics are accelerating this diffusion.

Looking ahead, inventory optimisation is likely to remain a top priority for fashion executives as the industry contends with ongoing demand uncertainty and compressed product lifecycles. The companies that build durable capabilities in forecasting, allocation and markdown management, underpinned by clean data and organisational buy-in, will be better positioned to defend margins and fund investment in other areas of the business.