Inventory is undoubtedly the prime asset of a business. Most of the profit for a company comes from selling its inventory. Managing it needs to be efficient, accurate, and proactive. If you have too much unnecessary inventory, it can tie up capital and bring your profits down. Studies have shown that the annual additional cost of holding excess inventory can be 25 percent to 32 percent.
Surplus inventory is one of the most common challenges faced by companies irrespective of their scale of operation. Maybe you’ve moved on to something new in your line of work and need to liquidate some of your inventory. Or, maybe you want to clear out a few old items that are taking up space in your home or warehouse. Whatever the reason, there are three smart ways to liquidate surplus inventory without making a huge mess, and we tell you how in this blog post.
Inventory may be broadly classified into three categories:
- Raw material and supplies: Unfinished items ready for the production process
- Work in Progress: Semi-finished goods
- Finished goods: Ready for sale items
What Is Surplus Inventory?
Surplus inventory is when you have an excess amount of what is needed, i.e, The inventory is in surplus, if the amount in stock surpasses the limit set by the company. While not all surplus inventory is a liability, most of the FMCG and CPG goods are a liability. Let us take an example to understand this better.
DEF Ltd deals in kitchen appliances and has a surplus inventory. Since the product in question doesn’t become obsolete soon and can be sold in months down the lane, it would be considered an asset. However, XYZ ltd deals in edible goods with a shorter shelf life. Hence, their surplus is considered a liability since it comes with an expiry date, and would lead to losses if not sold immediately.
Why Is Surplus Inventory Bad For Your Business?
Surplus inventory has many drawbacks and is a villain in the world of inventory management. Here are a few reasons why it is bad for your business:
1. High storage cost and space
You need a place to keep all your inventory, surplus and otherwise. When you have surplus inventory, it takes up storage space of other inventory that could actually bring in sales and with it, profits. Plus, storage spaces are quite expensive, given that different products need different storage environments to ensure top quality. Additionally, the service costs, inventory risk cost, and opportunity cost also add to the burden.
2. Break in cash flow and unnecessary investment of funds
You buy inventory thinking you will sell them off in the near future. But when you don’t, it is a dead weight and ends up breaking the cash flow. You also end up investing the money that you could have invested in some other place.
3. Loss of revenue and profits
It goes without saying that you make profits only when you sell the goods you produce. If you have excess inventory that you aren’t able to sell, it automatically means you have a loss of revenue and profit.
4. Obsolete/depreciated inventory
As mentioned earlier, products are ever-evolving. So, if you have surplus inventory of products that are constantly updated/renewed, then the ones you have in surplus end up going obsolete, and their value gets depreciated.
Why Does Surplus Inventory Exist?
Surplus inventory could be due to various reasons like forecast error, demand-supply mismatch, shipment delay, production issues, regional regulations, purchase order discrepancy, quality issues, lack of market stability, and more.
For example, let us say your business deals with vegan lipsticks. As a marketing strategy, you collaborate with a celebrity who has an upcoming movie. She endorses your brand on social media, and you anticipate a high demand due to which you manufacture more of the shade. However, you might have missed that external factors could play a significant role in this demand. Imagine someone digs out an image that shows her non-vegan lifestyle, leading to controversies affecting her credibility. That way, due to a forecasting error, you will end up with surplus inventory that you need to find new ways to sell. Not only would this overproduction lead to the need for an increased storage space, but also an urgent need for the surplus stock to be liquidated due to the nature of your business.
Now that you know why surplus inventory is bad for your business, learn how to liquidate your excess inventory with the following techniques.
How To Liquidate Your Surplus inventory?
Surplus inventory is an inevitable part of many businesses. Here’s what you can do to liquidate them and improve your bottom line.
- Remarket and reposition
- Conduct a sale
- Bundle and push
Remarket and reposition
There are chances your products aren’t selling because of how they have been marketed. Try revamping your product marketing strategy as a first step. Here’s how you can remarket and reposition your products.
- Product placement: Know which products are not getting a lot of attention? Place them strategically on your website and social media pages. Use them in your paid ads and see how quickly your products become a hit.
Tip: Make it a priority to improve the navigation on your site so it is easier for your consumers to explore the site.
- Search Engine Optimization: While this might be something people have been screaming about the past few years, it is not for no reason. If your products aren’t selling even after a couple of months, it is high time to give copywriting and SEO another try. SEO makes your product visible to more audiences, leading to higher chances of sales.
Your remarketing process could also include running a killer email marketing campaign. You could also use social media platforms like Instagram to transform your marketing strategy.
Conduct a sale
Before we get into how to conduct a sale, we need to tell you this: There are various techniques to controlling the inventory. These can be broadly classified into modern and traditional techniques. While all of them play a vital role in inventory management, when it comes to surplus inventory management, the selective inventory control technique of ABC analysis triumphs. It may be defined as a technique where inventories are analyzed with respect to their value so that costly items are given greater attention and care by the management.
The basic purpose of ABC Analysis in inventory management is to provide a basis for material management processes and help decide how the stock is to be managed. The inventory items are first classified, then their total cost is ascertained, thereafter ranking is done followed by the computation of ratio or percentages. Then finally the A, B and C categories are determined and given weightage based on their
You can use this method to understand your products better and conduct different kinds of sales to liquidate your surplus inventory. However, we recommend not having too many sales in one go so as to maintain people’s interest. Some of the sales you can hold include stock clearance sales, flash sales, and seasonal sales.
Clearance sales are a great way to sell off stock that hasn’t moved in a couple months. You will also do good by having a ‘Clearance’ section up all the time on your website so bargain hunters can check up on deals and you can post surplus inventory whenever you’d like.
Conducting flash sales on the other hand will create a sense of urgency and help increase the sales of surplus inventory. You can leverage your digital marketing strategy here and get the word out about your sale – through email campaigns, social media contests, and whatnot!
Seasonal sales are always one of the most sought-after sales among shoppers. Be it the summer sale or Christmas end of season sale, people love shopping then as the prizes are less. Take advantage of this and put your surplus inventory on sale.
Bundle and push
This must be one of the most used strategies worldwide. Brands, irrespective of their size of operations, can leverage this technique to push their surplus inventory.
Bundle and push basically refers to the process of bundling one product with another and selling it. There are a few strategic ways of bundling. We’re mentioning the most common ways of bundling here.
Complementary bundling is when you bundle two products of complementary nature together. For example, let us say your brand deals in hair care products. If you have a surplus inventory of conditioners, you can bundle them up with the shampoos and sell them off, maybe at a lower price. You can also bundle a slow-moving product with a fast moving product. You can also bundle a high margin product with a lower margin product. That way, your buyers would see it as a good bargain, and purchase the bundle. Another common option is to bundle multiple units of the same product. For example, selling a product at buy 1 get 1 offer price is sure to attract more sales.
Tip: Remember to do the ABC analysis so you know which products to push first.
How Can You Avoid Having Surplus Inventory?
With everything said and done, we are great advocates of ‘Prevention is better than cure’. How can you ensure you don’t have surplus inventory? We tell you how!
This is a simple technique that is employed to make sure there is no surplus inventory. FIFO stands for First In, First Out. It basically means to sell products that were manufactured/produced first. Doing so ensures the products in the inventory do not end up becoming obsolete.
For example, XYZ ltd is a seller of organic cosmetics. They produced a new batch of face gel in October that didn’t sell well. However, they decided to revamp their marketing strategy, and surprisingly, by November their products started selling well. This led to them producing more of the same product in January the next year. Instead of selling the new batch, they decided to sell off the stock from October first as the product had a shelf life of 2 years and it made sense to sell the October batch first. Hence, employing the FIFO technique successfully.
Invest in better demand forecasting
Planning is key to avoiding surplus inventory in business. The demand for any certain product changes very unpredictably. Nevertheless, there are specific methods which can help you predict how the demand might shift in a relatively short period of time. You can either use one of the various demand planning software available in the market or do it manually with insights from your previous experience. This would include employing techniques like exponential smoothing and simple moving average which help to measure trend direction over a period of time. If you want your forecasting model to be highly sensitive to unpredictable changes, we suggest exponential smoothing technique. Being prepared for the changes in demand will help you avoid any unnecessary increase in inventory. As you know, inventory stuck is capital blocked.
Remember, while just-in-time inventory stocking might sound like a good solution, they turn out more expensive than a properly planned inventory management system due to the last minute demand. For the uninitiated, just-in-time inventory refers to the inventory that is ordered just when it is needed as opposed to forecasting the demand and stocking the inventory. Just-in-time proved to be bad especially during the initial days of COVID-19 when manufacturing units that depended on raw materials from different regions had to face hurdles such as international regulation changes, grounding of cargo flights, lack of suppliers and manpower, etc.
In today’s world of artificial intelligence and machine learning, it’d be a sin not to leverage these advanced technologies to help your business go places. Automation of your supply chain process will help ensure you are on top of your game, and can also help with preventing surplus inventory. Right from placing an order, tracking inventory, seeing what products are in demand, replenishing inventory, everything can be automated to avoid human error and keep the wheels running seamlessly.
For example, if your brand has multiple manufacturing units, it would make more sense, and be more efficient to have a centralized, digitized procurement process. This will ensure supply chain visibility, where every transaction is tracked and accounted for while making sure the procurement costs are one and the same.
Bonus: Always be sure to calculate your inventory turnover rate. Inventory turnover is a measurement of the number of times inventory is sold in one year. The formula for calculating inventory turnover is: Cost of Goods Sold (COGS) divided by the Average Inventory for the year
For example, Reya Organics sold ₹500,000 in products this year and had an average inventory of ₹250,000. Per the formula, the brand has an inventory turnover of 2, which means it will have to replenish its inventory twice in the year. It helps for better planning the restocking and avoiding excess inventory.
Now that you know how you can liquidate your surplus inventory, let us know what tricks worked for you in the past by commenting below.
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