Most businesses fail to replenish their inventory on time. They overstock inventory to avoid stockouts which is expensive, draining their borrowing capacity. Surplus inventory leads to significant financial losses as companies sell stock at low market rates and write off unsold inventory as a loss.
Under and overselling stock is a sticky situation and maintaining that perfect balance requires a mix of analysis and modern techniques. In this blog, we’ll understand overstock inventory and insights to avoid such operational inefficiencies.
What is the System of Overstocking?
When your business is holding extra stock than you can sell at a particular time frame, you are overstocking inventory. Poor inventory planning prevents you from reaching full sales potential, denting your annual balance sheet. Whether big or small businesses, inventory hoarding is a primary bottleneck, affecting the company’s growth.
As per a statistical report, about two-thirds of retailers worldwide are overburdened with excess inventory. This shoots the costs for handling, shipping, storage, and merchandise. Often, retailers base their decisions on past historical data, ignoring the current trends.
They get overly optimistic and offload excess inventory hoping for a fast sell-out. But, the thing is, nobody can predict the behaviour of customers. However, we can certainly use inventory control techniques to minimise overstock inventory problems.
But, before, listing the solutions, let’s understand how retailers are affected by the changing inventory scenario.
Harmful Effects of Overstock Inventory
Depending on your industry, you may face many challenges in inventory management. Regardless of the cost, you are losing productivity and profitability. How? Let’s explore the possible consequences.
1. High Storage Costs
The worst possible effect of overstock inventory is the cost of storage and space. Occupying shelves and containers, they block inventory optimisation preventing the stocking of products that can sell.
This creates a negative ripple effect in warehouse management because selling overstock items is the priority at the expense of heavy discounts, and increasing maintenance costs. The result? Lost opportunity to maximise profits, limited space utilisation, and back-breaking order fulfilment.
2. Risk of Spoilage and Expiration
You need to race against time to sell overstock inventory. In the case of perishable and time-sensitive goods, overstocking creates the risk of expiration and product damage. This forces retailers to rethink their supply chain operations and sell excess items at below-margin prices.
Time is limited and the hidden impact includes lost opportunity cost, labour and transportation charges. The most important obstacle – It binds your working capital under a specific activity allowing no flexibility and scaling.
3. Inconsistent Cash Flow
Store owners see overstock inventory as a negative return on investment. Purchasing overstock items ties up cash snowballing into a bad investment. Most retailers lack the funds to replace excess goods delaying new product launches and stalling profitability.
To cover the increasing costs, companies transfer the burden of cost-sharing to their customers. This ruins customer satisfaction making them run to your competitors.
Additionally, exploring newer sales channels and marketing campaigns takes a backseat, leading to stagnated growth and expansion.
Despite the multiple challenges, retailers keep facing overstock inventory issues. Why does this problem occur? Let’s go beyond the tip of the iceberg to analyse it.
Why Overstocking?
Various reasons cause businesses to overstock. Here are a few listed below.
1) Seasonal Changes
Businesses selling seasonal products run the risk of overstocking inventory. With fluctuating demand across the entire year, excessive stockpiling leads to the accumulation of surplus goods.
2) Supply Chain Defects
Supply-demand mismatch due to external factors causes real problems. In recent times, the COVID-19 pandemic surged the demand for sanitisers and toilet paper. Retailers increased production to deal with the pain of stockout costs.
However, after the initial surge, the demand fell drastically resulting in overstock inventory.
3) Changing Economic Conditions
Many macro and micro economic conditions can trigger overstocking. Consumer preferences change and they decide to cut back on non-essential spending. Customer spending keeps the economy and the cash flow of companies running smoothly.
The inflation is at a record high or the product is no longer feasible to the customer. As shoppers change their spending habits, many retailers are left with excess inventory.
4) Excessive Production
The major cause of overstock inventory is the extra manufacturing of goods. Most product companies purchase greater inventory than market demand. This is done in the form of buffer inventory to avoid shortfalls or due to inaccurate demand forecasting models.
Another case is purchasing over the minimum order quantity to benefit from economies of scale.
Next, let’s understand how to reduce overstock inventory.
5 Ways to Inventory Control Solutions
Running a business comes with challenges, and the most daunting is managing inventory effectively. Overstocking can drain your finances, clutter your storage space, and lead to significant losses, especially if the goods are perishable or go out of fashion. Avoiding overstock inventory is crucial for maintaining a lean, efficient, and profitable operation. Here are five practical strategies to keep your business running smoothly.
1. Implement Just-In-Time (JIT) Inventory Management
This is a strategy where materials and products are ordered and received only as they are needed in the production process. This approach minimises the inventory held in stock and reduces storage costs. By closely aligning stock with production schedules and customer demand, JIT helps avoid the accumulation of excess inventory.
Implementing JIT requires a reliable supply chain and accurate demand forecasting, but when done correctly, it can drastically reduce the risk of overstocking.
2. Utilize Advanced Inventory Management Software
Relying on spreadsheets for inventory management? It’s time to upgrade because it is outdated and risky. Advanced inventory management software offers real-time tracking of inventory levels, sales data, and order histories.
These tools often come with predictive analytics capabilities forecasting future demand based on historical data and market trends. By having accurate insights into your inventory needs, you can make informed decisions about when and how much to reorder, thus preventing overstock situations.
3. Optimize Your Supply Chain
A well-optimized supply chain is the backbone of efficient inventory management. Building strong supplier relationships can lead to more flexible and responsive restocking processes. Negotiate with suppliers for smaller, more frequent deliveries rather than bulk orders that may lead to overstocking.
Additionally, consider diversifying your supplier base to reduce dependency on any single supplier and increase your ability to adapt to changing market conditions. An agile supply chain can quickly adjust to variations in demand, thereby reducing the risk of overstock inventory.
4. Implement Demand Forecasting
Forecasting involves predicting future customer demand using historical sales data, market analysis, and other relevant factors. Accurate demand forecasting helps businesses determine the right amount of inventory to hold at any given time.
There are various methods for demand forecasting, including qualitative techniques like market research and quantitative methods like time-series analysis. Combining these methods can provide a comprehensive view of future demand trends, allowing you to adjust your inventory storage solutions.
5. Conduct Regular Inventory Audits
Regular inventory audits are essential for maintaining optimal inventory levels. These audits help identify slow-moving or obsolete items contributing to overstock. By conducting periodic inventory reviews, you can make data-driven decisions about which items to reorder and phase out.
Inventory audits also help ensure that your records match the physical stock, reducing discrepancies that can lead to overstock or stockouts. Implementing cycle counting, a process where a small subset of inventory is counted on a rotating schedule maintains inventory accuracy without disrupting daily operations.
FAQs: Overstock Inventory: What it is, Techniques, and Insights
What is an overstock warehouse?
It is the practice of storing excess stock in your warehouse. Never resort to overstocking to create buffer inventory. This can increase your storage, handling, and shipment costs.
What are overstock items?
These are goods that haven’t been sold but continue to occupy space on the shelves of warehouses. All consumer goods can become overstock items.
What is overstocking cost?
The cost of holding excess inventory is the total opportunity cost lost to maximise profitability. This includes warehouse fees, insurance, storage, freight, and transportation costs.
Conclusion
Overstock inventory kills your growth potential confining you to bear the brunt of bad strategic decisions. Supply chain failures occur due to bottlenecks arising from internal and external factors. To gain control of internal factors, get in touch with Qodenext to eliminate inventory obstacles.
