What is excess inventory and how to manage it?
20 Jul 2021
Unfortunately, companies do not always sell products as quickly and effectively as anticipated by a company. Sometimes, they end their life cycle without getting sold. That unsold inventory is called excess inventory. It ends up being a burden on a business and appropriate management to avoid extra expenses as much as possible.
Definition of excess inventory
Excess inventory refers to the stock that reached the end of its product life cycle and could not be sold. Considering that the inventory is excess also assumes that you do not expect to sell it in the foreseeable future.
As it is known, inventory is a type of asset, which is to get sold and generate income. So, when companies fail to complete that mission, the stock depreciates and loses its value. It is usually called deadstock, which must be written off from the assets from the accounting and financial perspective.
Causes of excess inventory
Excess levels of inventory are usually not a result of an accident. There are specific causes behind unnecessarily high stock levels. Following are the top reasons that make it happen.
First and foremost, the most common reason behind extra inventory levels is poor demand forecasting. Demand and sales forecasting are among the most crucial supply chain components for retail and production businesses. The purpose of forecasting is to ensure adequate inventory volumes are available to meet market demands, but not too much to end up with excess stock. The competitiveness and complexity of the market, changing trends, and needs make demand forecasting a challenge for businesses. So, when companies use unreliable data or outdated prediction methods, they eventually end up with poor forecasts.
Poor management of obsolete stock
Companies operating in inventory-intensive industries cannot perform business activities without a proper inventory management system. However, even in that scenario, there is a risk of getting thighs out of control. Sometimes companies do not have enough preparation to control unnecessarily high volumes of inventory. They might choose to simply wait for selling the obsolete inventory in the future, which is not an intelligent approach to follow. Companies should pay proper attention to slow-moving stock because the obsolete inventory affects a company’s profits and causes high expenses. The advice is to ensure that you have enough human and other resources to improve inventory processes and reduce overstock.
Long lead time
From suppliers to manufacturers, all supply chain decision-makers aim to increase the safety of their lead time. They want to get extra time if something unplanned happens. As a result of long lead-time, supply chain processes become inefficient. It is crucial that everyone involved in the supply chain provides realistic lead time estimations. Accuracy of lead time estimations is essential will improve supply chain processes, including a permanent decrease of on-hand inventory volumes.
Vendors that provide you with goods are one of the most critical influencers of successful inventory management. Imagine a scenario where your company made early orders to ensure enough stock levels at a specific time, but the supplier eventually delivered the ordered stock very late. The next step would be containing even higher levels of inventory next time to cover potential demands in the future. As a result, the company might have to deal with excess inventory levels. So, a business must cooperate with reliable suppliers.
Disadvantages of excess inventory
You are probably guessing that excess inventory holds multiple disadvantages and no benefits at all. So, let’s see the most common issues that excess stock creates.
Prevents cash inflow
Companies purchase or produce an inventory for sale and income generation purposes. In other words, the stock is for generating cash and finance other activities of the company. When a company invests in inventory and fails to earn profits, it simply loses money that it could use otherwise.
Increases holding costs
Generally, inventory holding costs are one of the necessary expenses and can be very high. For example, you may be renting space to store that excess inventory, so you end up making expenses that turn out to be an absolute liability. Even if you own storage and use it to hold up the excess stock, you still have to make additional payments such as utility costs, security, cleaning, warehouse labor wages, etc.
Limits space for new products
Even if you own warehouse space, excess inventory creates opportunity costs. Since it occupies space in the storage, it limits the area for newer products to offer to customers and make earnings. Not to say that an overloaded warehouse is harder to manage effectively.
Depending on the industry, the worst scenario can happen when the stock becomes deteriorated, expired and useless. This is a common issue for businesses operating in the food and beverage, medical products industries, etc. Holding high inventory volumes increases the chances of products getting useless. As a result, there will be no chances for even selling them at a discount. You will have to write off that stock and throw it away. So, the business has to deal with the lost potential income and expenses that have already been made.
How to sell excess inventory?
So, what we understood so far is that there are unavoidable costs that excess inventory creates. However, if you manage to get at least some revenue for that stock, it is still better than nothing.
Off-price stores: Those stores are known to sell original products of famous brands at low prices. Off-price stores obtain excess goods, seasonal products, other low-demand goods and sell those at lower prices compared to other channels. Businesses may consider selling excess stock to those retailers and receive some income.
Discounts: If the product category allows, you can offer huge discounts on excess inventory and earn at least some amount on that.
Charity: Although giving your stock as a donation does not generate any financial income, it can improve your brand image and public awareness, which would benefit your business in the long run.
Giveaways: This is another way to generate intangible benefits for the company. You can give your products by promotions and enhance customer connections with the brand.
Excess stock is always a loss for a company. Businesses must have well-developed strategies of inventory management to deal with excess inventory and ensure long-term profitability effectively.