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Each company has its own set of strategies, KPIs, measurements, and inventory management methods. However, the obstacles and issues that businesses encounter when dealing with inventory are generally the same and can affect any business of any size.
Excess Inventory Definition
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 and it’s not expected to be sold shortly. Over-buying, faulty estimates, canceled orders, a weak economy, unforeseen weather changes, uncertain consumer demand, or late or early delivery of goods are all examples of mismanagement of stock demand.
Main Causes of Excess Inventory
- Inaccurate Demand Forecasting
In today’s competitive and fast-changing market, your company’s survival would be endangered if you don’t have a demand forecasting system. Many business owners skip this stage because they believe forecasts are unnecessary. They eventually discover, however, that bad forecasts or a lack thereof are the main cause of excess inventory. Basic calculations such as simple sales averages or static ordering models will not suffice.
When calculating a forecast, you must take into account all of the variables that can influence demand. These include both internal and external factors. Internal influences are those that have a direct impact on a customer’s willingness to purchase a product. Take, for example, seasonal trends. External influences are more difficult to forecast because they have an indirect impact on purchasing behaviors. For example, consider whether changes or unexpected economic fluctuations.
If a company fails to manage its processes, it may end up with excess inventory. A lot of tasks must be handled by the inventory management team, for example, making transactions, ordering, purchasing, and all other sales-related tasks. When the management system is disorganized, inventory tracking and ordering errors will occur. Inventory management will suffer as a result of a lack of coordination between sales, purchasing, and customer service departments.
- Unreliable suppliers
For effective inventory management, having reliable suppliers is critical. Assume you place your order early enough. Your supplier, on the other hand, retains the items for an unknown period, causing you to receive your order late. As a result, the next time you place an order, you’ll order far more than you need to fulfill future demand. However, you run the danger of having too much stock. That’s why it’s critical to engage with reliable suppliers that can fulfill requests on time.
Disadvantages of Excess Inventory
Cost of Storage
The cost of keeping extra inventory is extremely significant. To begin with, you will require space, and having more space implies spending more money. Even if you have enough space and don’t need to rent it, there are still costs to consider. Consider the storage’s utility costs as well as any other charges that may occur. You’ll also have to pay the personnel who will be in charge of keeping track of the inventory. Maintaining storage space, managing inventory, transporting it from one location to another, and so on are all part of management.
Storage Capacity
Even if you don’t have to pay for storage and lose money, keeping extra inventory is a difficult task. Excess inventory takes up space. Because your shelves are full of outdated inventory, you can’t offer newer products to customers. The more overloaded your storage, the more difficult it is to keep track of stock levels. Managing the inventory would necessitate more labor hours and a greater amount of effort.
Lost Profit
The loss of revenue is one of the most serious consequences of excess inventory. Products degrade and lose their initial value over time. As a result, the longer you keep a product, the less it costs. We’re talking about widespread items here. You not only pay a lot of money to keep the excess inventory, but you also sell it for a low price. The cost of inventory isn’t the only issue. Typically, businesses sell their items for less than what they purchased for them. They lose revenue as a result of lowering the profit margin.
Demand Variability
Demand is the most unstable thing out there. It’s affected by several external and internal factors that can’t always be accurately predicted. 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 them with excess products. The more inventories you keep, the more likely you’re to lose them 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 at a discount because no one would buy them. And naturally, the last thing you want to do is to sell spoiled food.
Inventory Management Software for Inventory Control
Excess inventory has so many disadvantages that the list could go on and on. Having too much stock brings up many problems that you need to solve. So why not deal with excess inventory problems? Owners of businesses must ensure that everything in their firm is well-organized and handled. The turnover rate of inventories should be high. Adopting an inventory management system, which helps keep inventory under control, is the best solution to handle the excess inventory problem.
Adopting inventory management software will help solve all the problems mentioned above and deal with excess stock. You can eliminate all of the reasons for overstocking by using the software. As we’ve mentioned before, the main cause of excess stock is the inability to forecast it. You’ll be able to develop more accurate forecasts, track inventory levels, orders, and sales with inventory management software. It’s the most effective way to avoid overstock and deadstock issues.
Inventory management software will do the following:
- Make real-time reports to make sure your company has the proper amount of inventory at the right moment.
- To enhance client satisfaction, get real-time estimates of your stock risks.
- 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.
Even small firms should adopt inventory management software in this age of technology and innovation. It will help in the organization of internal operations and the improvement of cash flow. You shouldn’t rely on manual calculations because they are the least reliable.
You can sign up for a free trial of ElmaSys Inventory right now to see if it’s the right inventory management software for you.
To find out if ElmaSys is a good fit for your business, click here for a demo.
How Can You Sell the Excess Stock?
We’ve finally approached the most important question that bothers all business owners. How to sell excess inventory at a maximum? We present you the best techniques to get rid of excess stock, yet make some profit out of it.
Off-price stores: Those stores are known to sell original products of famous brands at low prices. Off-price stores obtain excess goods, seasonal products, other low-demand goods and sell those at lower prices compared to other channels. Businesses may consider selling excess stock to those retailers and receive some income.
Discounts: If the product category allows, you can offer huge discounts on excess inventory and earn at least some amount on that.
Charity: Although giving your stock as a donation does not generate any financial income, it can improve your brand image and public awareness, which would benefit your business in the long run.
Giveaways: This is another way to generate intangible benefits for the company. You can give your products by promotions and enhance customer connections with the brand.
Conclusion
Excess stock is always a loss for a company. Businesses must have well-developed strategies of inventory management to deal with excess inventory and ensure long-term profitability effectively.
