Have you experienced a spike in storage costs? If so, your business might be suffering from excess inventory. This issue affects your business in different ways, such as increased labor costs or insufficient storage space.
Even if you’re not facing the worst of these signs, excess stock burdens your business by tying up your capital in assets.
In this blog, you’ll discover how to deal with this issue by learning what excess inventory is and how to avoid it.
What Is Excess Inventory?
Excess inventory is all unnecessary stock or work-in-process goods in your storage that you do not need immediately. In other words, you have excess stock when your replenishment cycle is unbalanced. And so, you’re buying more stock than you’re selling.
For example, let’s say you sell books. One day, your storage room is full, yet you’ve just received a shipment of books. This means you have a surplus of books.
And what happens to excess inventory? They’ll become obsolete, meaning you may wait to sell or use them promptly. This means they can go bad, as with fresh food. As for the bookstore example, some of the books might be part of a trend – not selling them on time could result in missing the trend and these books becoming obsolete.
What Causes Excess Inventory?
Understanding how to reduce surplus inventory starts with knowing its causes. So, let’s look at the different reasons for this problem:
- Overproduction: When you make more products than your customers want to buy, you’ll end up with stock piling up in your storage.
- Poor Forecasting: Inaccurate expected sales will make you plan for more sales. And in doing so, you’ll have more stock than your customers are to buy.
- Errors in Procurement: Humans make mistakes; it’s normal that you might order the wrong item or order it in the wrong quantity. In either case, you’ll have more stock than what you need.
- Low Demand: At times, the cause is completely external, such as customers no longer wanting a product because inflation has increased its price.
- Shipping Delays: When raw materials take more time than expected to be delivered, you might buy more from a supplier. However, when all shipments arrive, you’ll have more stock than you need immediately.
- Overstocking: You might have excess stock if you buy too many products or raw materials.
How to Avoid Excess Stock?
It’s crucial for your business’s bottom line that you minimize your surplus inventory. Your inventory holding costs should be an average of 30%.
With these methods, you can avoid unnecessary inventory:
1. Use Just-in-Time Concept
Using the Just-in-Time concept, you only produce goods with a customer’s order. And so, you eliminate safety stock. This concept encourages you to utilize all resources to reduce costs in every department fully.
However, Just-in-Time brings the risk of delayed production when your supply chain is affected. For example, if your supplier delivers a raw material late, it’ll slow your production schedule. Plus, your customer might cancel the order, damaging your reputation.
2. Audit Regularly
By auditing your inventory, you can discover whether you are involved in taking note of all the items you have, in what quantity, and in what production stage.
Additionally, you must make these audits frequently and track the changes over time. Through these audits, you’ll discover which items you have in excess. By tracking these items, you can figure out why you have enough stock. For instance, let’s say you notice that after the holidays, you have an excess of reindeer plushies.
In this case, you might deduce that the cause is failing to sell your inventory before the holidays end and buy less inventory to avoid excess stock.
3. Forecast Demand Accurately
To fully benefit from forecasting demand, you need to do it accurately. And so, you need to use exact data that matches your inventory levels. Additionally, your data should be taken over long periods so that you can understand trends.
Note that the period within the year is important as well. After all, you can’t use average sales for the year when you know you have peak selling seasons. Otherwise, you’ll have shortages during peak seasons and surplus inventory during low sales periods.
4. Automate Stock Management
You should use a stock management system that measures your inventory levels automatically. A stock management system can make note of all the stock that enters and leaves your storage.
And so it can alert you when your inventory is about to go below what you need for your typical operations. Similarly, this system can warn you not to buy more stock when your storage reaches its maximum capacity or when you have enough of an item.
5. Refresh Product Marketing
When you notice that certain items should be selling faster than they are, you can use marketing to influence their sales. Here are a few strategies that you can use:
- Donation: When you give away your unneeded products, you reduce your stock and gain a benevolent reputation.
- Discount: You should mark down the price of the excess product to encourage customers to buy it.
- Liquidation: This involves bulk-selling your stock to a re-seller.
- Freebie: You should attach your obsolete stock to products that sell well to get rid of them.
6. Reassign Surplus Stock to another Location
If you have multiple selling locations, you should analyze how your different sales locations sell the excess items. Then, you’ll transfer the items to the locations that are most likely to sell them quickly.
Conclusion
As you have discovered, knowing what causes this excess and how to deal with it is crucial to avoid unnecessary expenses. After all, if you have stock you don’t require, you still have to pay for its storage.
By using Just-in-Time process, changing your marketing and selling tactics, auditing your inventory, forecasting demand accurately, and automating your stock management, you can easily manage and avoid excess stock, regardless of how you got into this situation.
