What is Excess Inventory and How to Manage it
When sales are up, business is peachy. But when they’re down, oh man! You’re not just dealing with a drop in sales—you’re dealing with excess inventory that could turn into dead stock.
While every production-led business might have its own headaches, one they’ll always share is inventory. There is no secret recipe to inventory success: it can affect any industry and business size. But what matters most is how you control and respond to these incidents.
What is excess inventory?
This concept is not to be confused with dead stock. Excess inventory sales or “overstock” occurs when there isn’t enough demand for a particular product; therefore, it remains unsold. The reason for this hiccup can be anything from poor demand forecasting to canceled items or guestimate orders that end up being far too much. Several things can cause it, but what it really comes down to is poor data quality. When dealing with inventory, accurate data and insights can guide your decisions and prevent situations that can threaten your bottom line.
How do you identify excess inventory?
Ideally, with excess inventory solutions that can simplify data tracking and performance measuring. However, you can manually analyze your stock by using these formulas:
Sales per square foot = annual sales ÷ total square feet of store
Days inventory outstanding = (average inventory ÷ cost of goods sold) x 365
With this key information, you will be able to identify the health status of your stock.
Before an item becomes obsolete, it goes through a process. Unsold items still have the potential to convert, but dead stock will, sadly, become obsolete. Each product differs, which is why you need to split items into cycle categories before making any impulse decisions. These categories can be anything from ‘active stock’ to ‘excess stock’ and ‘dead stock.’
What are the causes of excess inventory?
There is a multitude of reasons for excess inventory, but commonly the causes are:
1. Poor and wrong demand forecasting
The market is constantly changing, and if you’re not monitoring or analyzing them against credible data, you’re constantly going to be making poor prediction decisions. This is one of the most common causes of excess inventory, and it usually happens when you measure against the wrong KPIs and your forecasting technology is outdated. You need to rely heavily on consumer behavior and market trends to meet demands during your planning stages.
Replenishing stock is another concern. You cannot use the same strategy for every product. Often, you buy in bulk to avoid stockout or customer dissatisfaction, but these purchases can come back and haunt you. Not every high-end product has the same level of importance, and vice versa. Instead of having everything available, split your inventory to ensure diversity.
2. Lack of product life cycle tracking
Similar to bad forecasting, businesses tend to lose track of slow-moving inventory.
By leaving items sitting on the shelf, you’re wasting money and space. Pay attention to every product’s life cycle and tweak your selling strategy to appeal to your customers.
Again, you might purchase in-bulk one busy season, and naturally, you expect the same level of interest in future seasons over the same time. Unfortunately, this is a false sense of security. Things change, and relying on old tactics is the fastest way to generate excess inventory.
Always factor in seasonal demand, current turnover, and market trends into your planning.
3. Ongoing supply chain disruptions
During and post the COVID-19 pandemic, there have been many global supply chain disruptions. This, of course, affects customers in a number of ways and, as a result, leaves businesses in a vulnerable position. To combat it, businesses tend to over-order to avoid disappointment. These decisions should not be taken lightly. Instead of guestimating, invest in a demand planning solution that can help you better predict and respond to disruption. These tools will provide you with the right information to make smart decisions.
Disadvantages of excess inventory
While there are advantages of having inventory on hand, if you don’t have a resilient inventory control plan, you’ll end up dealing with these three disadvantages, among others.
1. Less working capital available for teams
With a low company turnover, you’re unable to scale departments or invest in new business opportunities. Depending on how much excess inventory you have, you might find it difficult to consider new resources or assets, and this could potentially lead to dept and failure.
2. More security, storage, and insurance costs
As mentioned, excess inventory drains your cash flow and jeopardizes growth in other areas of your business. However, it also means you’re going to be spending more on unnecessary costs. For example, storage fees, security, and product deterioration (depending on what you sell).
From a storage perspective, you might be looking at external warehouse and maintenance costs. Security can be anything from staff physically manning products to the technology used to monitor movement. To avoid your business coming to a complete standstill, you might purchase other products to stay afloat. But remember, whenever you add new items to your inventory, your storage volume rises, and so do your insurance premiums.
3. Decrease in product value due to storage
No matter the product you’re selling, it is bound to decrease in value the longer you keep it. If, of course, you’re selling perishables, you face the risk of them deteriorating. With other tangible items, you face the risk of them becoming outdated. You need to factor these hiccups into your sales approach, as they will affect the price you’re selling them for. To clear out as much excess inventory as possible, you will have to sell products at a lower price and accept that you will lose money.
How to manage excess inventory
To be frank, there are countless ways to manage inventory, but without the right tools, you’ll keep encountering the same problems. So, beyond reselling items at a promotional, lower cost, returning items to the seller—and the list goes on—get your management tactics covered.
1. Plan ahead for demand
An inventory management solution provides companies with transparency on what is happening with products. It records every movement related to an SKU number, while alerting teams with up-to-date information to prevent stockouts, excess inventory, and more. When you’re able to rely on accurate data, you can analyze trends that make it easier to plan ahead.
2. Revisit marketing campaigns
Take a look at your product and marketing strategies to see if there’s an opportunity in new markets. For example, off-season goods in your region are ideal for other regions. In addition, get creative on your remarketing messaging to retarget customers from a different angle.
3. Optimize, optimize, optimize!
Carry out an inventory audit to identify long-term and best-selling products. Use these products to regain momentum in troubled times, and consider cross-merchandising tactics too. You can also use slow-moving inventory as promotional add-ons to products to speed up your excess clear out. It is crucial that you use accurate data when planning to deliver your ideas to increase the chances of success and to avoid future demand forecasting failures.
How can Intuendi prevent excess inventory?
In a turbulent market, you need to prioritize demand planning and make better decisions.
Intuendi software can help you strike the right balance between sufficient inventory levels and customer demand. It’s an easy-to-use add-on that integrates with your existing inventory management software. This next-generation tool makes it possible to select the desired strategy and model you want for generating the forecasts and then combine them with advanced algorithms for detecting trends, seasonality patterns, and correlations with external factors.
It’s specifically designed to help you take control of your data.
Get a demo to see how Intuendi can help you.