Why having overstock inventory is bad for your company and what is inventory in general? All business owners deal with the disadvantages of excess inventory. The high inventory holding cost is one of them. In this blog post, we’ll discuss why having too much inventory on hand is bad for your business. And we’ll introduce you to the most efficient solutions for dealing with overstock inventory.
What Is Excess Inventory?
What is excess inventory and why it happens? Excess inventory refers to that inventory, which is at the end of its product life cycle. It either hasn’t been sold or it’s been kept for a long period of time. And it’s not expected to be sold in the near future. Excess stock is often referred to as dead stock and it must be written off the company’s books. In general, inventory means goods and materials that a company owns, which must be sold to consumers. If the inventory isn’t sold for too long, it depreciates and loses its value.
Excess inventory usually happens when you have products that haven’t been sold because the amount exceeds the projected demand. You can end up having too much inventory if you fail to properly manage the stock. Such mismanagement happens in case of internal and external factors. Internal factors are inaccurate demand projections, canceled orders, or untimely delivery. External factors include unexpected economic fluctuations or weather changes.
Some retail stores have a policy when they consider all the inventory important and keep it on shelves much longer than they are supposed to. They do so because they hope to sell the products for their full price one day. However, such an approach is very wrong. The slow-moving inventory usually is way more expensive to hold and manage. So even if you eventually sell it for full price, you’ll end up in loss. That’s why slow-moving inventory should be immediately removed, not to create extra expenses. Having too much inventory on hand is associated with loss of revenue.
Main Causes of Excess Stock
An excess inventory doesn’t happen by accident. There must be specific causes behind having too much inventory on hand. Below are the top 5 causes of having excess stock.
- Bad forecasting and predictions – the first and most obvious reason is failing to properly forecast the expected demand. Businesses use different ways and strategies to forecast consumer demand. However, many implement unreliable and outdated methods, which eventually lead to poor predictions. The market is complex and the demand variability may be excessive. The forecasting model must take into consideration all the factors that can affect demand. It’s impossible to have sufficient inventory levels without accurate forecasting. You will end up with overstock inventory, which will cost you a lot.
- Poor inventory management system – the inventory management team must be responsible for a number of tasks. For example, making transactions, ordering, purchasing, and all of the other tasks related to sales. When the management system is unorganized, this will result in poor inventory tracking and ordering mistakes. Bad coordination between sales, purchasing and customer service departments will lead to poor inventory management. So having too much inventory can happen if the company neglects the management of the processes.
- Failure to manage the obsolete inventory – even if you have a proper inventory management system, sometimes things can go out of control. You must be ready to somehow handle the stock if you end up having too much of it. Expecting that your obsolete inventory will sell out at some point in the future is not a smart approach. You don’t want to simply ignore your slow-moving inventory. The obsolete inventory will affect your profit and create a lot of costs. So make sure to have a team working on improving the inventory process, reducing the overstock.
- Long lead times – everyone in your supply chain, from suppliers to manufacturers, makes sure to add a safety factor to their lead time. They do so to have some extra time if something goes unplanned. This results in long lead times and inefficient supply chain. It’s important that everyone in the supply chain process provides you with a realistic estimate of lead time. This will help reduce lead times, upgrade the supply chain, and permanently decrease the stock number you keep on hand.
- Unreliable suppliers – having reliable suppliers is essential for successful inventory management. Consider you make an order early enough. However, your supplier holds the goods for an unknown period of time and you eventually get your order late. So next time, when making an order, you’ll purchase way more than you need to cover future demand. Yet, you risk to end up having too much stock. That’s why it’s important to work with suppliers that are reliable and deliver orders in a timely manner.
Disadvantages of Excess Inventory
As we’ve already mentioned the cost of holding excess inventory is very high. Firstly, you will need space and using extra space means spending extra money. Even if you have enough space and you don’t need to rent it, still other expenses are involved. Consider the utility costs for keeping the storage and all the extra expenses that might arise. You will also have to pay to employees who will be managing that inventory. The management includes maintaining storage space, organizing the inventory, transporting it from one place to another, etc.
Even if you don’t have to rent storage space and lose additional profit, holding extra inventory is a hard task. Excess inventory takes up space. You are limited in offering newer products to customers because your shelves are busy holding old inventory. The more overloaded your storage is, the harder it is to properly manage the stock levels. Managing the inventory would require more labor hours and harder work. There are specific measurements that help determine how efficient the product turnover is. You can use those to make sure that your inventory is not getting outdated.
One of the most important disadvantages of excess inventory is the loss of revenue. Products depreciate over time and lose their initial value. So the longer you hold a product, the cheaper it gets. We’re talking about commodity products here. So not only you spend a lot of money on holding the overstock inventory, but you eventually sell it cheap. So the inventory cost is not the only issue. Usually, companies sell the products at prices below the amount they paid. They end up lowering the profit margin and lose revenue.
Demand is the most unstable thing out there. It’s affected by a number of external and internal factors that can’t always be accurately predicted. So the inventory you have on hand today might not be something your customers will want to buy tomorrow. Although there are ways of demand forecasting, you can’t do it with complete accuracy. Everything changes so fast with the rise of globalization that it’s nearly impossible to guess what would happen tomorrow. So the best strategy is to always keep your inventory levels optimal and not overstock it with excess products. The more inventory you keep, the more likely you’re to losing it due to excess demand variations.
Perishable and Deteriorating Inventory
The worst thing that can happen to your inventory is that it can either deteriorate or become useless. Such situations may happen to only certain types of products. For example, consider food and medicine products. If you keep too much of such inventory on hand, the chances are that the products will go bad. You will have to throw them away. You won’t even have a chance to sell them on a discount because no one would buy it. And naturally, the last thing you want to do is to sell food that is spoiled. You want to hold inventory levels of such products low for better profitability in the long-run.
Inventory Management Software for Inventory Control
There are so many disadvantages of excess inventory that the list can go on and on. Having too much stock brings up many problems that you need to solve. So why not to deal with excess inventory problem? Business owners must make sure to have everything in their company smoothly organized and well-managed. The inventory turnover rate should be high. The best way to solve the excess inventory problem is to adopt an inventory management system, which would help keep control of the inventory.
Adopting an inventory management software will help solve all the problems mentioned above and deal with excess stock. Using software, you will be able to eliminate all the causes of overstocking. As we’ve mentioned before, the main cause of excess stock is the inability to forecast it beforehand. With inventory management software, you’ll be able to create more accurate forecasts, track inventory levels, your orders, and sales. It’s the most optimal solution for avoiding overstock and out-of-stock problems.
An inventory management software will:
- Create real-time reports to ensure that your business has the right level of inventory at the right time,
- Get real-time estimates of your stock risks, in order to maximize customer satisfaction,
- Optimize the inventory levels by taking into consideration future demand, lead times, desired coverage and available stock,
- Help you grow your business while reducing inventory costs.
In this era of technology and innovations, even small businesses should use inventory management software. It will help organize internal operations and improve cash flows. Manual calculations are least accurate and you shouldn’t rely on those.
How to Sell Excess Inventory?
Now the juicy part: how to sell your excess inventory without losing too much revenue? There are several ways you can rid your storage from excess stock. The most profitable one is to sell it via off-price stores. An off-price store sells well-known brands’ original goods at cheap prices. Off-price retailers purchase overstock goods, seasonal products, canceled orders, and goods that are low in demand. They offer reduced prices compared to the item’s cost in other shopping centers. You can sell your excess inventory to off-price retailers and gain back some money.
There is no way you can sell your overstock inventory and not lose profit at all. However, you can find a way to sell and create a minimal loss. In either way, holding that inventory would always cost you more than the margin you lose by selling it.
Here are some more ways to deal with excess inventory:
Depending on the product and the reason it ended up on excess inventory shelves, you can offer heavy discounts to sell out your overstock. It’s better to get something than nothing at all.
Donating your products to charity is a great way to boost your brand image by getting involved in corporate social responsibility. You don’t want to keep the excess inventory anyways, so why not to increase public awareness by donating products?
This is another method which won’t create any revenue but would bring intangible benefits to your company. Consider giving away products via promotions. You’ll improve customer satisfaction rates and the experience they have with your brand.
Excess inventory loses company money and restricts cash flows. Dealing with it is important for the long-term profitability of your company. Low turnover means poor sales. Get rid of that overstock and grow your business tremendously!