How to Identify and Avoid Surplus Inventory?
Businesses often face the problem of carrying surplus inventory, which brings to poor cash flow and unwanted costs. Excess and obsolete inventory is something that companies can’t avoid having. However, there are different strategies you can follow to avoid surplus inventory as much as possible. Also, if you already have excess stock, you can use techniques to sell the surplus inventory. It’s very important that you don’t keep the inventory surplus because it will cost you a lot. Having too much inventory on hand is quite a burden. So it’s important to learn to avoid it in the first place.
In this blog post, we’ll provide you with the techniques to avoid surplus inventory. We will also share different ways to help you identify the surplus inventory you already have.
Consequences of Holding Surplus Inventory
First and foremost, let’s make it clear why you don’t want to keep excess stock. Here are the bad effects of holding too much inventory:
- High storage costs – extra inventory means extra storage to keep the items. The storage space is usually limited and keeping the old stock on your shelves is quite costly. You can consider renting the extra stock, which will cost money. Yet, if you decide to keep the stock in your warehouse, you will spend extra money on the maintenance of that stock. But you will risk not having enough space for the new items.
- Obsolete inventory risk – when you keep certain items for too long, they might become obsolete. The value and quality of such products keep decreasing while you keep them. Eventually, they will become useless and you will have to throw them away. So it’s important not to keep inventory for too long and sell it as fast as possible. Keep in mind that even by selling them, you will have to do so at a much lower price. But isn’t selling at a lower price better than throwing the products into trash bins?
- Change in demand – demand for a product can be variable. It’s crucial to forecast it before you decide on the inventory number you want to order. When you order your inventory relying on a pure guess, you risk not to sell all the products. When you order too much inventory, eventually, the stock won’t sell because of demand variability. The more stock you keep, the higher’s the risk to lose it to demand variations.
How to Identify an Excess Stock?
Every business owner knows that their company holds some surplus inventory. However, not everyone realizes the importance of excess inventory management. Inventory surplus is indeed a common problem that companies fail to solve timely. If you have pulled yourself together to finally solve the issue then the first step is to identify that stock.
The quickest way to determine if you have excess inventory is to answer the following questions:
- Do you have products in your store that you’ve kept for more than a year now?
- Do you run excessive discounts too often?
- Do you have a section in your storage for keeping exceptionally seasonal (or other) products that didn’t sell?
If you answered yes to at least one of the questions above then you might have a problem. Some businesses have a false assumption regarding keeping the inventory for too long. They expect that they will be able to sell those items for their full price one day. However, this approach is completely wrong. Remember that you’re losing more money by keeping the extra inventory rather than selling it for a discounted price. Excess and obsolete inventory is not an asset for your company.
Improper excess inventory management is the root of generating a surplus inventory. Answering the above questions will give you some understanding of where you currently stand. However, determining the excess inventory you hold requires a more practical approach. Answering questions might seem easy, nevertheless, your answers must be based on actual data. There are specific formulas you need to use to estimate how much obsolete inventory you hold. Consider the following:
- Sales per square foot = annual sales ÷ total square feet of store
This equation determines how efficiently the store creates sales based on the available store space. The higher is the number the better it is. If you run a bigger store, you can use the equation for each department or store section. In fact, sectioning your store would give you more accurate results. You will have a more clear vision of how each department or section operates and what shall be improved.
- Days inventory Outstanding = (average inventory ÷ cost of goods sold) x 365
The DIO equation helps identify how long it takes before the inventory turns into actual sales. The lower the number the better for the DIO. You can find the average inventory by adding the beginning and ending inventory cost for a 12 month period and dividing it by 2. If you calculate the DIO and it turns out to be 80, this means that your store sells the entire inventory within 80 days.
The numbers you get can vary depending on your industry. To understand how you’re doing, compare the numbers with similar retailers. This will help you understand your performance numerically and you’ll avoid any possible errors that are based on guesses. Distributors need to prioritize the excess inventory by shelf life, aging, turnover, and investment value. It’s always more practical to avoid having excess inventory and eliminate all the root causes. Next, we discuss how exactly you need to avoid forming too much inventory.
Ways to Avoid Excess Inventory
- Plan Ahead the Demand
Planning is the key to every mismanagement within the company. Businesses most often face excess inventory because they fail to plan the inventory beforehand. Accurate demand planning and forecasting are essential if you want to avoid having excess stock problems. The demand for any certain product changes very unpredictably (non-commodity products). Nevertheless, there are specific methods which can help you predict how the demand might shift in a relatively short period of time.
Demand planning is crucial for successful supply chain management and implementation. There are two ways how you can forecast demand and sales. You can either use demand planning software or do it manually<. Having a preplanned demand plan and schedule, you will avoid carrying too much inventory on hand, improve the supply chain visibility, and enhance customer satisfaction.
- Automate the Ordering Process
Similar to demand planning and forecasting, the ordering process too can be implemented automatically or manually. The sales ordering process is often made even more challenging because it is still a highly manual process. Manual operation can hitch the process in many ways. It might slow down the ordering process affecting everything from costs and errors to slower order fulfillment. Any obstacle in the ordering system will slow down the supply chain operations, eventually harming the customer service. An ordering error can cause additional expenses related to restocking or reshipping, inventory mismanagement problems, and delays.
Automating the ordering process will help ultimately avoid human errors. The benefits of the automated ordering process are numerous and they are derived from enhanced accuracy, efficiency and speed of the automation. The visibility is improved within the supply chain processes, and tangible waste is eliminated because physical labor is not required. Most importantly, the customer service and experience will be improved, as the automated process will resolve all the issues more quickly. You can automate the process from the very moment the order is received to minimize any human error chances.
- Implement Marketing Strategies and Plan those in Advance
If you eventually end up having excess and obsolete inventory then you will have to take certain actions to eliminate it. Excess inventory management is essential for any business because it will guide the excess inventory sales processes. There are several ways how you can rid yourself from excess and obsolete inventory. Carrying excess stock on hand hampers you from making a profit. So excess inventory sales will help improve your cash flow in the bottom line.
Excess inventory management implies having certain marketing strategies on hand to sell the items when needed. Firstly, make sure to work with liquidity services. Liquidity services, often found in online marketplaces, will buy excess stock directly from the merchants and resell the products at low prices. It’s a win-win situation because you will free up your shelves for new products, and the liquidity service will buy the excess stock. You must also have some marketing techniques. For example, consider selling the products for steep discounts or offering bundles and special promotions (e.g. free shipping or “two for one” sales). Such promotions will help in excess inventory sales by boosting customer engagement.
Keep in mind that it’s impossible to avoid having excess inventory entirely because it’s impossible to forecast the demand at absolute accuracy. However, there are many ways to minimize it and avoid having too much of it. It’s best to start by identifying how much inventory surplus you have and analyze your previous actions to spot specific trends. And try to automate as much of the processes as possible to avoid human errors.