Sometimes, less is more when it comes to your inventory supply. Excess inventory can pose challenges like storage restrictions, expired items and wasted capital. These are just the immediate effects. Overstocking can also have various long-term impacts, such as additional labor requirements, lost time spent repositioning products, reduced profit margin and transportation or transshipment costs.
To prevent excessive inventory, you’ll need to know what causes it and how supply chains and stores can prevent these challenges from impacting their bottom line. Learn how to reduce inventory overstock in your store or warehouse with these tips and strategies.
What Is Overstock Inventory?
Overstock occurs when a business orders more of a product than it sells. As a result, the company has excess inventory that occupies valuable warehouse or shelf space, which could otherwise accommodate new stock. This surplus can harm the business’s bottom line by wasting profits, driving up storage costs and leaving the company with obsolete or expired inventory.
What Causes Overstock?
Store and warehouse overstock can occur for a few reasons.
- Inaccurate demand forecasting: When you don’t research or fully understand the demand for a product, you may manufacture or order more items than necessary. Accurate demand forecasting is a critical aspect of inventory management.
- Seasonal fluctuations: Many businesses experience some type of seasonal demand. For instance, retail stores often sell holiday-themed merchandise during their fourth quarters. You might order a large supply of seasonal items to meet these temporary demands and then struggle to sell the excess inventory once the season wraps up.
- Compensation for supply chain disruptions: Retailers, warehouses and manufacturers may be tempted to compensate for supply chain issues by stocking up on excess inventory, resulting in overstock.
- A poor inventory management system: A lack of inventory management insight is another typical cause of excess stock. If you don’t effectively track inventory and expenses, you may find yourself stuck with costly overstock. That’s why tracking metrics like stock levels, carrying costs and the cost of goods sold is essential. Businesses can benefit from high-quality inventory management software to monitor this data.
What Are the Challenges of Excess Inventory?
Overstock inventory can present a few roadblocks for businesses.
- Drive up storage costs: The more inventory you have, the more storage space it requires. Investing in additional storage space can be a costly venture for stores and warehouses. Excess inventory takes up precious square footage in back-of-store stockrooms and shelving units, leaving less room for newer, more in-demand products that sell quickly and bring in revenue.
- Cause cash flow issues: Purchasing bulk items that don’t sell can tie up cash flow. You won’t recover the investment until those products sell. This tie-up in capital starts to snowball if you lack the budget to replace overstock inventory with new items. The process can hinder new and lucrative product releases.
- Leave behind expired products: When it comes to managing time-sensitive and perishable items, overstocking can result in an abundance of damaged products unsafe for use or consumption. You risk expired, unusable or obsolete inventory when you stock up on more than you need. With a limited window to sell these overstocked items, some businesses mark these products at below-margin prices in a last-ditch effort to free up space and resources.
- Harm the environment: Excess inventory also poses environmental risks. For instance, the more items a manufacturer produces, the more resources, like raw materials, water and energy, they use. These resources often generate more carbon emissions. Additionally, excess merchandise with no chance of selling could end up in landfills.
Fortunately, you can often prevent these issues. With diligent planning and a clear management strategy, you can avoid the challenges of excess inventory.
How to Reduce Inventory Overstock
If you find yourself with more inventory than you know what to do with, try these methods to cut down on excess items:
