How to Avoid Inventory Overstock and Understock
06 Apr 2021
While running an e-commerce business, there are some cases that are the worst to think about. The majority of retailers knows them perfectly. Those are understock, outofstock, and overstock. The reason is that they can’t run out of inventory or have extra stock to sell and meanwhile expect to make money. So the most important here is to keep the balance betwixt out-of-stock, understock and overstock. Accordingly, from the following article, you’ll learn about the problems of overstocking. We view it through the basics of stock management and control. We’ll also look at the best ways to manage stock levels, avoid overstocking and prevent stockouts.
What are Understocking and Overstocking
The 2 central and essential situations connected to the item amount are overstocking and understocking. Let’s see what overstocking is and what understocking is.
- Overstocking, as a rule, happens when the business orders more inventory than it actually needs (too much)
- Understocking takes place when the business orders not sufficient amount of stock (too little)
For overstocking and understocking possibility minimization, retailers develop particular systems. They refer to keeping, maintaining, selling and shipping various types of inventory. All these system tasks are supported by inventory management. Properly organizing these processes enables retailers efficient cooperation. And also it protects from shortages. One good example can be the use of liquidation stock.
Why is Overstocking Dangerous?
Overstocking is one of the apparent pitfalls in a retail business. The inventory covers the space in the warehouse. You need to pay money for that space. This means that holding too much inventory results in higher costs. Those costs are related to storage and warehouse-related expenses, as well as shrinkage and losses.
Why is Understock Dangerous?
Inventory overstocking is not the best option to have. But on the contrary – run out inventory is even worse. Understocking influences your sales decreases your reputation in your customers’ eyes. It destroys the brand image you have worked on for a long time. Being out of stock or having goods finished leads to customer loss. How? Imagine retailers can’t provide their customers with the items they want. Of course, it does not satisfy them. They simply start to look for it anywhere else. It means they become potential customers of your competitors.
You probably started to worry about this topic. Not surprisingly. Here are some facts about understocking and out stocking.
- Some studies compared e-commerce business rates to brick-and-mortar stores’. It became apparent that rates are higher more than 2 times in the first one.
- 25% of consumers usually continue shopping when they face stockout. But they do it somewhere else. 43% of consumers go to another website and find the same item there.
- HBR studies show, 72% of stockouts happened because of poorly organized replenishment. It also happened because of non-correct inventory management.
How to Prevent Inventory Overstock and Understock?
There are many technologies and strategies to avoid stockouts and overstocking. All of them contain the component of inventory management and control. It helps to define the number of items to sell. And also see why they have not been sold or obtained. Now we come to the main strategies.
Accurate data collection
The supply chain includes thousands and millions of items. They all should be transferred and dealt with. With all of them coming and going, it is possible to have non-correct information about them. These errors mainly refer to wrong data transfer from paper to computers. It is also possible when taking products from stocks to warehouses. The one good solution to avoid such situations is to take care of accurate data collection.
Inventory Management Software
The second solution flows from the first. They are pretty similar to each other. Here we highlight the importance of obtaining an inventory management system. Thus, it enables sellers to use these technologies to monitor and control items through their way inside the supply chain. Prominently, such systems ensure management at different levels starting from manufacturing and warehousing, reaching the shipping and delivery processes.
Inventory management systems are different in their type and capability, but all retain the primary function. They support item identification at various levels.
At this point, we would like to mention our software that deals with all the functions of supply chain management, helps to overcome non-correct inventory amounts and deal with the problems of overstocking and understocking.
Reorder Point Calculation
There is a minimal unit amount that sellers need to have on hand before reordering. It is called reorder point – one of the most widespread methods. And it ensures understock prevention. This method can be a valuable tool helping to deal with your average inventory as well. Which means reorder point calculation is a necessity.
Consumer Demand Determination
Consumer trends and demands are on the top of vital points in retail. To determine consumer demands, retailers should focus on the following:
- The new product categories depending on consumers’ desires.
- The novelty in existing categories (new listings, for example).
- Customers’ new preferences regarding the products.
Including Third-party Logistic Service Providers
Of course, people, tools and technologies matter. All these help in stockout and overstock reduction. And one bright method is the use of a 3PL system. It will help in your e-commerce order fulfilment.
eSwap as an understock and overstock reduction method
And the final note. We’d like to mention that you can also use eSwap. It can also be a reliable method to get rid of overstock and understock situations. With eSwap, we guarantee you’ll forget about any missing data and failures. eSwap includes all the tools and features that ensure optimal inventory levels.
In consequence, you will never leave your customers without their desired products. Check out all eSwap integrations. As a result, make your business better with one of the top SaaS software.