“Excess stock in your inventory”, the words itself tells you that your company is facing the situation of extra inventory in the warehouse, which is holding your working capital and storage space for new products.
Many companies argue on the advantages of having excess and safety stocks in their warehouses and believe it’s beneficial in the longer run. Let’s discuss more on the excess stock situation in our warehouses and ways to deal with it.
What is Excess Stock?
Excess stock in our inventory are the products that have not been sold and have exceeded their customer demands. These extra stocks will be lying in the warehouse for any future demand requirements.
These overstock situations majorly happens due to factors such as over-buying, inaccurate demand projections, cancelled orders, bad economy state, unforeseen weather, causal reasons like sale in other competitive brand, or late delivery of goods from the supplier and more.
Causes for Excess stock:
Excess stock levels are typically caused by three ways :
- Excess stock due to inaccurate demand forecasting – Items will be built upon the warehouse shelf if you overcast the needs of the marketplace and order more inventory than needed. Hence, it is very important to get your demand forecasted as accurately as possible which involves the identification of the seasonality and upward or downwards trends and adjust the forecasts according to it. You also need to account for the external factors.
- Poor Replenishment tactics and excess stock – Inventory replenishment involves ordering the proper amount of stock at the right time and forecasting the demand at the proper time. Building up of excess stock can be prevented by adjusting the reordering points and quantities in line with supply and demand variables.
- Excess stock management and the product life cycle – All the products go through the product life cycle – like from the introduction of the market, through maturity, to decline. Excess inventory often occurs in the decline stage of the product life cycle. But there is still demand for the product, this is the beginning of the phase-out and if you fail out of the spot, you will continue to order based on the previous demand patterns.
Why Does Excess in Inventory Exist?
Excess stock in the inventory result due to a number of disruptions in the product demand supply cycle. Some of the factors are categories below as :-
- 60% Shipment delays – Shipment delay from the suppliers are one of the major causes of overstocks. A lot of factors are involved in the mismanaged shipment like processing times, order frequency and international regulations and more which cause excess and obsolete stocks in the warehouses.
- 25% Technical issues – Various challenges faced due to incorrect demand forecasting, system integration, incorrect purchase orders, lack of visibility and planning in the business.
- 15% Other factors – These factors are caused due to returned goods, damages products due to weather, quality issues in the products and item recalls etc, and more.
Read More – High Inventory Levels: Overcoming the Challenge
Advantages of Excess inventory
Be prepared for increased sales
One of the advantages of high stocks is that companies are always prepared for situations like increased or excess of product sales. In many cases, during festivals or peak season, companies run out of stock for the products in demand, but when we keep our warehouses overstocks with products than the usual sales, we can handle scenarios like excess sales and peak season product requirements as well.
Many business owners can take advantage of wholesale rates when they buy more quantities of products in bulk. This purchases usually makes sense for regular items which have a routine requirement in the market and are sure to be sold in the current market trend or in the near future.
When we just keep enough stock to get through the normal sales cycle, products in the shelves can look sparse as we get closer to the next order cycle. Empty shelves in the market gives a sense of negativity to the probable customers of the products.
The appearance of full shelves sends a positive message to the customer that business is good and the store is ready to handle all kinds of demands. Keeping a store stocked with items to sell, requires adequate planning and some extra inventory in warehouses for fulfilling a huge amount of customers on an everyday basis.
Companies often stock up on their inventory to handle uncertainties in the market and climatic changes in the environment. Such stocking up of inventory is also called “buffer inventory or safety stocks”.
Many times companies come across external factors which affect the supply and demand cycle of various products in numerous unanticipated ways. In these scenarios companies often use these stocked up goods to run the production cycle and continue their smooth business delivery process. In scenarios like – delay in raw material deliveries, or damaged goods due to natural calamity etc can be handled with these safety stocks to maintain the customer delivery deadlines.
Read More – 4 Reasons for Carrying Safety Stock Inventory.
Disadvantages of Excess stock
1. Obsolete Inventory
In most of the cases, over stocking of products can cause obsolete inventory in the warehouses. This is true in most of the technology based products, especially in cases of smartphones and televisions which go obsolete and out of demand in every six month time frame as soon as a new version of these items hit the market. Other manufacturing sectors are not an exception to the rule but are hit equally due to changing customer demand and market trends. One of the equally hit industries is the clothing business, where as the fashion changes the current set of products quickly become out of demand and cause huge a lot of products stocked up in warehouses and company godowns.
These overstocked obsolete products are either discarded completed or are sold on promotional offer which incurs huge losses for the manufacturing firm.
2. Increased storage costs
Commercial spaces for warehouses and company godowns are usually leased per square foot. With more products in hand, companies need huge storage place for their inventory.
Huge inventory adds on to the warehouse charges along with more manpower cost for the warehouse maintenance and other additional upkeep charges like electricity, security and more.
Also in case of a fire, theft or another natural disaster, not only will the business be recuperating, it will need to pay higher premiums as insurance rates go up with more storage space in the warehouses.
3. Tying up Capital
A company acquires inventory for the purpose of reselling the products at a profit for turning that inventory purchase cost into cash inflow that can be used to pay the day to day expenses of the company. With excess inventory in the warehouse, the working capital of the company decreases as the products are not sold and the invested money is not recovered and reinvested on other profitable deals.
Obsolete and outdated inventory adds on to the misery for the firm, where companies have to either sell these products under loss or minimum profit to free up the tied up capital with the product purchases.
4. Quality Reduction and Product reduction
Storing excess stock may lead to quality problems like degradation and potential obsolescence. Companies will stock a high level of inventories in anticipation of demand for recurring orders with long customers, but customers might change the requirements and specifications for future products over time. In such situations, companies should purchase new materials and supplies which are needed to build a relationship with the customer according to their specifications, which also leaves in large quantities of excess stock. Business identifies and isolates the quality problems with the smaller quantity or reorder purchases.
Excess Inventory and Inventory Turnover
Inventory turnover measures how quickly a company can sell its inventory and its comparison against industry averages.
Working on your balanced inventory turnover is a good way of understanding which items are reducing your cash flow and increasing the cost of your business.
Let’s understand how to deal with excess stock and maintain a stable inventory turnover for a profitable business strategy:-
A little planning can help you minimize your losses and avoid excess inventory in the first place, says Lucie Le François, a BDC Business Consultant advising entrepreneurs on inventory management and business operations.
“It’s a hard decision that people postpone because no one wants to take the hit,” Le François says.
How to deal with Excess Stock
1) Put someone in charge – Management and higher authorities should assign individuals who can track companies inventory requirement, monitor product trends and provide input on reordering stock which are having good demand cycle and identify slow moving products to avoid further stock ups. Close management and accountability of inventory movement in the warehouses is an excellent way to improve stock management for the company.
2) Decide what’s excess inventory – Excess inventory for one company maybe a required amount for the other firm. Once we decide on what is the appropriate amount of required inventory for our company, we can manage the excess amount automatically.
We need to consider factors such as the amount of inventory we need to meet customer or production demand, also the supplier lead times, storage costs, item shelf life and how quickly items become obsolete. These factors will help to balance the exact amount needed for sufficing our demand trends and also keep an appropriate amount to handle excess sales or delay in lead time and more.
Read More – How to Avoid Inventory Planning Pitfalls
3) Identify excess items – Knowing and identifying your extra stocks are very important. We should have clear knowledge on which products is too much in our warehouses. We should take appropriate action to identify the exact reason for these excess products and avoid any further delay for these product circulation and also abstain from reordering these stocks.
4) Way ahead – Once we understand the amount of excess stock we have in our warehouses, we should have a plan on what to do with excess inventory. Options like offering customers a discount or promotional offer on the excess stock, perks for employees selling more of outdated stocks, giving these products for charity, return the excess stock to suppliers or other ways to remove these excess stocks as soon as possible from the warehouses.
In the worst cases, disposing of these outdated and obsolete items turn out to be way more cheaper than further storing them in the warehouses.
5) Monitor your inventory – Healthy inventory storage come with good information. A good inventory management software like SalesBabuCRM, helps in recording the quantities, location, acquisition date and reordering frequency and other details of all items, which helps in the overall management of inventory movement in our warehouses.
“It’s very easy to forget about aging inventory, then one day realize, ‘Woah, we have a lot of stock,’” Le François says.
Proper auditing and regular sync up of the inventory data help in maintaining a balanced amount of inventory in our stocks.
Read More – Inventory Management Software
Now we understand that excess stocks are an asset in many ways but managing these extra stocks are even more critical to maintain a well balanced profitable business strategy.
Read More – Online Inventory Management System