Getting the right amount of stuff in stock can be tricky.
If you have too little, customers get mad. If you have too much, things go bad or go out of style. Bad stock management can cost lots of money every year.
This problem has been around since people sold things in markets long ago, and it’s still a big deal today, whether you’re running a small shop or a big online store.
People who handle buying and selling stuff often wish they had a magic wand to get just the right amount of things in stock.
To solve the problem of not enough or too much stuff, you need to follow some rules and use technology to help manage your stock better. That’s what we’ll talk about in today’s blog.
Defining Overstocking
So, overstocking is basically when a business ends up with more stuff than it actually needs. This extra stock just hangs around in stores or warehouses, taking up space and tying up money that could be used elsewhere. It’s like having a closet overflowing with clothes you never wear—it’s not doing you any favours, and it’s not helping your bottom line.
Causes of Overstocking
1. Inaccurate Demand Forecast
Misjudging demand forecasts remains a primary driver of overstocking and understocking woes. Numerous variables influence customer demand, rendering precise forecasting a challenging task.
2. Stock-out Panic
The dread of stockouts drives companies into a frenzy, fearing the repercussions of unmet demand. This fear often triggers impulsive purchasing or production decisions, fueled by the specter of stockouts. These reactions often result in overcompensation and overstocking if demand doesn’t meet expectations.
3. Inefficient Marketing
Overestimating the efficacy of marketing endeavours frequently culminates in overstocking quandaries. Businesses, entranced by the allure of their promotional campaigns, may overlook other crucial factors influencing demand. Marketing is crucial for demand, but it needs a deep understanding of various demand drivers.
4. Inaccurate Inventory Management
Without automated systems, companies risk overordering due to inadequate visibility into existing inventory levels. Human errors further compound the problem, resulting in skewed inventory management practices. Effective inventory management hinges on precise data regarding stock levels, demand forecasts, and order rates.
4 Ways to Avoid Overstocking
1. Enhance Demand Forecasting Accuracy
Avoiding overstocking hinges on precise demand forecasting. Analyze various factors influencing purchasing decisions, such as market size, historical sales, and socioeconomic indicators.
Incorporate insights into market trends and conduct test campaigns to refine predictions. Optimizing supply cycles based on these forecasts ensures inventory aligns with demand, facilitating lean supply chain strategies.
2. Implement Real-Time Inventory Tracking Systems
Leverage automated inventory management systems for real-time visibility and error reduction. These systems streamline supply order planning and minimize warehouse management costs.
By cataloguing inventory across multiple locations and adjusting SKUs based on orders, they optimize supply cycles and prevent excess stock. Additionally, generated analytics aid in identifying key performance metrics and calculating SKU-specific costs.
3. Determine Optimal Inventory Levels
Calculate ideal inventory quantities based on supply cycles, demand forecasts, and fulfilment rates to prevent overstocking and understocking. Maintaining optimal levels mitigates inventory-to-sales ratio discrepancies, with safety stock acting as a buffer against inaccuracies.
4. Define Inventory Distribution Strategies
Strategically distribute inventory across various locations to prevent overstocking and enhance market proximity. Logistics distribution aligns inventory with demand in different regions, reducing logistics expenses and facilitating faster clearance of excess stock.
Defining Understocking
Understocking happens when a business doesn’t keep enough inventory to meet customer demand, causing stockouts and potential lost sales. When what’s on hand doesn’t match immediate needs, it leads to unhappy customers.
This in turn can also result in a hit to the business’s reputation. Tackling both understocking and overstocking can cut inventory costs by up to 10%, highlighting the need to get inventory levels just right for business success.
Causes of Understocking
1. Supply Chain Disruptions
Unexpected events like natural disasters, labour strikes, material shortages, or production issues can disrupt the supply chain, leading to goods’ unavailability and causing stock-outs.
2. Poor Demand Forecasting
Inaccurate predictions of customer demand can result in stock-outs, often necessitating increased inventory levels to meet customer needs.
3. Supplier Delivery Delays
Despite ordering sufficient stock, delays or incomplete deliveries from suppliers can lead to stock-outs, impacting inventory availability.
4. Incorrect Lead Time Management
Using a supplier lead time shorter than their actual delivery time can result in delayed deliveries, leading to lower re-order levels than necessary. This can exacerbate stock-out situations.
2 Ways to Avoid Understocking
1. Forecasting Sales Based on Historical Data
Harness the power of historical sales data to anticipate future demand. Whether it’s weekly, monthly, quarterly, or annually, selecting the right timeframe is key. Take, for instance, a pool equipment business versus a gift shop.
While the former experiences peak sales in the summer, driven by increased pool usage, the latter maintains a more consistent sales pattern with spikes during holidays. Tailoring your forecasting approach to your business’s unique sales cycles ensures accurate predictions and effective inventory management.
2. Setting Alerts for Stock Thresholds
Stay ahead of inventory fluctuations by implementing automated alerts tied to stock levels. By aligning these alerts with your inventory KPIs, you can effortlessly monitor inventory status until a notification prompts action.
This proactive approach ensures timely replenishment and minimizes the risk of stockouts. Set alerts with ample lead time, factoring in supplier timelines and your own, to facilitate seamless ordering, shipping, and receipt of new inventory.
FAQs: The Ultimate Guide to Overstocking and Understocking
What are the advantages of overstocking?
Here are some benefits
- Buffer against unexpected demand spikes.
- Negotiation leverage with suppliers.
- Preparedness for supply chain disruptions.
- Ability to fulfil large orders quickly.
How to deal with overstocking?
Consider this simple approach:
- Offer promotions or discounts.
- Implement inventory clearance sales.
- Return excess inventory to suppliers.
- Adjust future purchasing based on sales trends.
Is it better to overstock or understock your inventory?
Overstocking reduces stockout risk but ties up capital and space, however, unstocking minimizes capital tied up but risks lost sales and customer dissatisfaction. It is therefore to be noted that maintaining a smooth balance between both of them is the key to success.
How to identify deadstock in your inventory?
Follow these steps:
- Track sales velocity and turnover rates.
- Monitor ageing inventory.
- Conduct regular inventory audits.
- Analyze sales data and customer demand trends.
Conclusion
In the intricate dance of inventory management, overstocking and understocking loom as perennial challenges. Our ultimate guide has unveiled their nuances, from causes to remedies.
Whether navigating the perils of overstocking’s capital drain or understocking’s customer discontent, balance is paramount. Qodenext stands ready with tailored solutions, leveraging technology to harmonize inventory levels and unlock efficiency.
With strategic forecasting, real-time tracking, and proactive alerts, businesses can steer clear of overstocking’s excesses and understocking’s pitfalls. Embrace precise inventory management for sustained success in today’s marketplace.
