If you’ve been following our blog, you’d already know how important it is to manage your inventory efficiently. In this blog post, we tell you how those stocks you’ve been hoarding in your warehouse (Yes, overstocking) are affecting you right now and what you can do to avoid it.
Overstocking is what happens when you stock up on inventory that is in surplus to what you sell at a given time. According to Retail Wire, overstocks cost the average retailer 3.2 percent in lost revenue, amounting to $123.4 billion every year. Let us take an example to understand the concept better.
Kabir owns a business that deals in scrunchies. He specializes in producing scrunchies that are trendy, and sells them at 20 per piece, with an average sales of 20 scrunchies in a day. Looking at the market trend, he ends up making 1000 units of satin scrunchies in pastel colors. However, a celebrity starts using faux fur scrunchies, altering the demand for satin scrunchies. Now, he is left with many units of scrunchies that aren’t really salable due to the change in customer preferences. This is called a situation of overstocking.
Causes of overstocking inventory
While overstocking can happen due to various reasons, they all fall under the below umbrella:
Poor inventory management
Proper management of inventory is the backbone of any business. It is what brings them their revenue and profits. Poor judgment often leads to businesses either understocking or overstocking goods and incurring losses they didn’t intend to have. Even in today’s tech-savvy age, many businesses still engage in offline modes of inventory management that have a high scope of human error. Poor inventory management is not limited to just not using tech-led software. It can be anything, right from not knowing how much inventory to produce, what are the costs incurred, what do your audience want, to having poorly trained employees who cause damage to the products.
Demand forecasting is the smartest way to ensure you produce the right amount of inventory for your business. Knowing what the demand for your products look like can help you make data-backed decisions and help avoid severe losses. However, many businesses choose to guesstimate the demand and end up either overstocking or understocking the inventory. Instead of investing in a robust demand forecasting tool, they often choose to go with the flow. This leads to unexpected losses that could have been avoided had they invested in a forecasting tool. Seasonality is something to be aware of here. The demand for certain goods skyrockets during certain seasons. Brands, at times, end up seeing that as a positive sign and manufacture more of the particular product only to be left with an overstock as soon as the demand dies down.
Fear of stockouts
This has been known to be the most prominent reason for overstocking in recent times. When Covid hit, not just businesses but also the customers ended up hoarding essentials because of the fear of not having enough stock. This psychological fear costs businesses a lot. They end up buying more inventory to make sure they don’t run out of stock when needed. Though this ends up being helpful in some cases, not all inventory can afford to be overstocked.
You can read our blog post on everything you need to know about stockouts to know how you can navigate through going out-of-stock.
Bonus: Another prominent reason why your stocks aren’t selling and you’re left with tons of extra inventory is your marketing strategy. Yes, having a poor marketing strategy can many times lead to poor sales. And poor sales means you’re left with inventory you couldn’t sell. Remember to analyze your customers’ buying patterns and make informed marketing decisions to promote your brand.
The vast majority of these issues are processes that made sense at one time, but either the business outgrew it or changed, making the process a bottleneck. The above must have left you wondering how bad is the impact of overstocking on your business. We tell you now.
Overstocking can often have an unfavorable impact on your business. Here are what we think are the worst.
Impact of overstocking inventory
Storage costs and space
Overstocking can lead to you incurring various costs out of which the storage cost can be the highest. When you have surplus stocks that aren’t being sold, the inventory will have to be kept at your storage facility that could be charging on a weekly, daily, or even an hourly basis. Not only is it leading to a high storage cost, it also ends up eating the space that could have been utilized for some other inventory.
The fear of a product going obsolete is real. Today, there’s a new trend every single day. If you end up overstocking on inventory, and the trend changes, you will be facing losses due to obsolescence. Brands that work with highly tech-led products are often prone to these losses if they have an overstock. They can usually be seen selling the products on discount right before an upgrade to the product is launched in the market, to ensure they sell off all inventory.
How often have you found yourself looking for products that went missing? You are so sure it was there when you started the cycle count yesterday, but cannot find it now. Many times, the chances of products being stolen or damaged are high when you are overstocking. This loss of inventory can also be attributed to administrative error, vendor fraud, and cashier error. It is basically the difference between recorded inventory on a company’s balance sheet and its actual inventory.
Shelf life of a product is one thing customers never forget to look at. The farther you are from the ‘best before’ date, the better. However, when brands end up overstocking, the product ends up being on the wrong shelf (the one in the storage space). The longer the product stays there, the higher the loss the brand faces.
Yes, the impacts can be worrisome. However, we tell you ways you can avoid overstocking.
How to avoid overstocking inventory
Invest in a robust inventory management system
If you manage your inventory on Excel sheets, this might pique your interest. There are tons of amazing, AI-led tools available in the market that let you manage your inventory from anywhere, at any time. Such tools or software help you track your inventory, see what levels the products are in, manage your taxes and invoices, handle billing, and do so much more. You can have a central record of your entire supply chain operations and streamline your business significantly.
ProTip: While selecting a vendor for inventory management, make sure you know what are your objectives for adopting the platform. It could be anything like ensuring you have sufficient stock, optimizing sales, providing a better experience, or keeping wastage at minimum.
Engage in cycle counting
A cycle count is a perpetual inventory auditing procedure, where you follow a regularly repeated sequence of checks on a subset of inventory. Frequent counting allows potential discrepancies to be discovered and corrected more quickly, reducing the impact of errors. Performing the ABC analysis lets you have frequent checks of the most popular, high-selling items. It in turn helps you restock and replenish the inventory with only the necessary stock.
ProTip: Always set a minimum and maximum point for the inventory. That way, when you know you have reached the maximum inventory point, you can stop producing more of the goods. Similarly, having a minimum point ensures you restock the inventory only as and when needed.
Efficient data collection
Clive Humby said “Data is the new oil. Like oil, data is valuable, but if unrefined it cannot really be used.” It is of utmost importance to collect data. But, what is more important ultimately is to collect data that is relevant. If you aren’t sure what data is needed, you will have to rework on your business strategy. All decisions with respect to the inventory must be made after reviewing the data insights. Leveraging data can help you understand how many units of each inventory would be needed at any given time. It in turn ensures you don’t end up understocking or overstocking any goods.
ProTip: Perform ABC analysis and analyze the resulting data to understand which set of inventory is of utmost significance to your brand and streamline your processes accordingly. You can read our blog on the ultimate guide to ABC analysis for inventory management to understand this better.
Stay informed of current affairs
It goes without saying that demand is always fluctuating depending on the happenings in the society. To ensure that what’s happening around you doesn’t have any devastating impacts on your business, ensure you are fully aware of the global as well as local happenings. Be it the pandemic or diplomatic wars between nations, everything has an impact on your business. Being aware of current affairs ensures you are well prepared for what is coming and can help you take better, fully informed decisions.
Bonus: Not sure what your inventory is costing you? Check out these metrics that can help.
- Sell through rate: (Quantity Sold / Original Quantity Available) x 100
- Gross margin return on investment (GMROI): Gross Margin / Average Inventory Cost
- Inventory Carrying Cost: Sum of all costs for unsold inventory ≤ 30% of inventory’s value
- Inventory-to-sales ratio: Available Inventory for Sale / Quantity Sold
What other ways can you think of to avoid overstocking? Let us know in the comments section below.
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