Business Inventory Management: How to Avoiding Excess Inventory
Excess inventory may be an invisible killer for many types of businesses. It ties up valuable resources, takes up space, and increases the risk of products becoming obsolete.
While almost all businesses experience situations like this: too much stuff on the shelf collecting dust, or not enough of the best-selling items. It’s time to develop a strategy that keeps your shelves stocked just right—neither too full nor too empty. Let’s look at the reasons for excess inventory and effective ways to prevent, reduce, and manage it.
Business Inventory Management: How to Avoiding Excess Inventory
Understanding Excess Inventory
Excess inventory, an unseen difficulty for many businesses, is caused by a variety of factors including stock mismanagement, faulty demand forecasting, and supply chain interruptions. The consequences can range from wasted perishables to damaged merchandise, all of which have an impact on the bottom line.
Small businesses frequently make the mistake of ordering too much inventory, believing it is a safe investment. Excess inventory may tie up money that can be invested elsewhere. Overstocking can cause financial hardship and a waste of resources.
On the other hand, underestimating demand might lead to stockouts. Running out of stock might result in missed opportunities and dissatisfied customers. This not only results in lost sales but may negatively impact your company’s reputation.
How Do You Determine Excess Inventory?
Calculate the expected stock and the average number of daily stocks using the first technique. Divide total monthly sales by 365 days minus the number of days left in the month to get the average daily sales.
Average Daily Sales = Total Monthly Sales / (365 – Days Before the End of the Month)
Once you’ve determined your average daily sales, multiply the threshold by your average daily sales to determine the target stock.
Target Stock = Threshold x Average Daily Sales (Dirve from the first calculation)
Once you have the Target Stock, subtract it from your Stock on Hand (SOH) to determine surplus inventory.
Excess Stock = SOH – Target Stock
There are many methods for keeping track of excess inventory. Another simple method for calculating excess inventory is using inventory management software to trace all inventory movement in storage.
Main Causes of Inventory Surplus
Inventory surplus can be caused by various factors in the business landscape, below are some of the main reasons:
Overestimation of Demand
One common cause is an overestimation or miscalculation of client demand. Inventory surplus can be worsened by poor forecasting methods or dependence on obsolete data. Retailers may overestimate demand if they do not understand customer behavior or reply to inaccurate data. For accurate inventory estimates that are matched with customer demands, robust customer data is required.
Fear of running out of popular items often leads to overordering. Striking a balance between maintaining healthy inventory and avoiding excess stock requires a nuanced approach to demand forecasting.
Effective marketing is indispensable for product sales. Retailers must tailor strategies to their specific products, incorporating customer behavior analysis, data analytics, and audience research.
Inventory Management Failure
Poor inventory management, coupled with a lack of insight into purchasing, carrying, and shortage costs, contributes to excess inventory. Inventory management weaknesses such as inaccurate order quantities, delayed orders, or duplicate orders, can contribute to excess inventory since inventory is not linked with actual demand. Prioritizing robust inventory control is crucial to preventing these issues.
Seasonal changes in demand occur frequently in businesses. If inventory levels are not adjusted appropriately, there may be a surplus during off-peak seasons. Since the seasonality of products can significantly impact inventory levels. Strategic planning and leveraging multiple channels during peak seasons are vital to avoid overstock.
Supply Chain Hurdles
Issues in the supply chain may trigger overordering to compensate for expected shortages. Delays in the supply chain, unexpected increases in production lead times, or changes in supplier reliability can all disrupt the balance of demand and supply, resulting in excess inventory building. Leveraging data analytics for inventory management ensures optimal stock levels despite external challenges.
Certain industries, like fashion or perishable goods, face unique challenges leading to surplus inventory. Thorough niche study and staying abreast of trends are vital for avoiding overstocking.
Consequences of Surplus Inventory
Excess inventory brings a slew of disadvantages, impacting the financial health of retail and e-commerce companies.
Keeping excess inventory raises carrying costs, which include charges for storage systems, warehousing space, and labour. This increased expenditure becomes more problematic when the surplus is difficult to sell. Increasing storage demands translate to added carrying expenses, including rent, utilities, insurance, and additional staff wages, complicated inventory management, and requiring more resources.
Excess inventory not only incurs various costs but also contributes to missed investment opportunities.
Tying up capital on unsellable items limits access to liquid capital, prolonging the recovery period.
Surplus and slow-moving inventory depreciate over time, leading to potential losses when selling at reduced prices. Prolonged storage in a warehouse can also cause product deterioration, damage, and expiration. This risk increases for products with a limited shelf life, which contributes to increased unusual deterioration and waste.
Beyond expiration, surplus inventory may become obsolete due to evolving trends or technological advancements. This renders the inventory useless, perhaps resulting in income loss. Inventory expansion also raises the danger of loss due to theft, damage, or loss, worsening financial hardship.
Excess inventory drains cash by consuming valuable storage space that could otherwise be used for high-demand items. Furthermore, the depreciation of surplus assets over time may force them to be sold at a loss, reducing profit margins.
Strategies to Reduce Excess Inventory
Selling Excess Inventory
To encourage the sale of excess goods, use dynamic pricing. Spotlight products, refresh marketing, and consider discounting or bundling surplus units to encourage customer purchases. Offering deep discounts, bundle offers, or limited-time promotions can all be used to attract consumer interest and drive sales.
Delighting Customers with Surplus
In addition, it offers attractive discounts or repackaged deals to stimulate sales and expedite inventory turnover. Incorporate surplus stock as freebies in order to surprise and delight customers, fostering loyalty and repeat purchases.
Donating Surplus Stock
Instead of disposal, consider donating unsellable inventory to charities for sustainable solutions and potential tax benefits. Contribute excess inventory to charitable organizations, potentially qualifying for tax deductions.
Refund or Credit for Returns
Negotiate returns with suppliers for refunds or discounted items, minimizing losses associated with excess stock.
Diversify Inventory Usage
Reallocate surplus raw materials or supplies to create new products, optimizing valuable shelf space.
Collaborate with Partners
Work with industry partners or competitors to exchange excess inventory, fostering industry relationships.
Collaborate with distributors or online retailers to sell excess inventory, even if it means a potential loss.
In cases of immediate need, consider liquidators to swiftly remove excess inventory, albeit at a reduced price.
For obsolete inventory with recyclable materials, selling items for scrap can recoup some value. Consider environmentally friendly disposal methods for inventory with no other viable options.
Preventing and Reducing Excess Inventory
Excess inventory management plays an important role in optimizing operations and maintaining financial health. Here are some effective strategies for reducing surplus inventory:
Accurate demand forecasting is critical for avoiding excess inventories. Take a deep dive into your historical sales data. Identify patterns and trends to make informed decisions about future stock levels.
Utilize inventory forecasting strategies to examine past sales data, seasonal trends, economic demand, and macro-level changes in purchasing behavior. By harnessing the power of predictive analytics, businesses can align their inventory levels with actual market demand, minimizing the chances of surplus accumulation.
Dynamic Pricing Strategies
Explore the realm of dynamic pricing with our expert insights. Learn how strategic pricing adjustments can not only clear surplus stock but also contribute to revenue optimization.
Dive into pricing strategies and selling channels that can go outside traditional channels. Keep discovering new methods to move excess inventory quickly and profitably, with minimal influence on your company’s financial health.
Streamline your operations with a just-in-time approach. Explore user-friendly software and tool options to automate and streamline your inventory management process. For example, Radio-frequency identification (RFID) technology provides real-time visibility into your inventory. This can help prevent errors and improve the overall efficiency of your operations.
JIT inventory management ensures that stock arrives just as it’s needed, minimizing excess and reducing carrying costs. It not only saves time but also minimizes the risk of human error.
Building Strong Supplier Relationships
Communication and transparency are key to maintaining optimal stock levels. Establish open lines of communication with your suppliers. Keep them informed about your inventory needs, and work together to prevent overstocking or understocking issues. Flexibility in ordering helps prevent overstock situations and promotes a more responsive supply chain.
Continuous Monitoring and Adjustment
Market conditions and consumer preferences evolve. Encourage coordination across the sales, marketing, and inventory management teams. Having these departments work smoothly together increases coordination and decreases the likelihood of overstock issues. Regularly reassess your inventory strategy and make necessary adjustments to stay ahead of the curve.
While surplus inventory poses financial challenges, proactive strategies and robust inventory management systems can mitigate its impact. Utilizing advanced inventory management software ensures accurate tracking of supply and demand, allowing businesses to optimize inventory levels and achieve target profit margins.
At SPExpress, we offer services from order fulfillment to supply chain management services that include freight forwarding, transportation, warehousing, picking and packing, inventory and supply chain management, and order fulfillment. We work closely with our customers to ensure their 3PL needs are being met properly. Since we understand how valuable working with a reputable 3PL provider can be, and how it can help our customers to focus on growing their businesses.