What is Excess Inventory?
Excess inventory is a relatively simple concept, but its causes, effects, and solutions can get complicated. Essentially, excess inventory occurs when stock levels for a particular product exceed forecasted customer demand, leading to inventory that goes unsold.
For manufacturers, wholesalers, retailers, and e-commerce businesses, having too much inventory on hand can cause a variety of problems, from reduced cash flow to high storage costs to obsolete dead stock.
Effective excess stock solutions require detailed data surrounding product seasonality, forecasted customer demand, and supply chain efficiency, among other metrics, in order to have enough inventory to meet customer demand without ending up with product that won’t sell. Leveraging this data through proper inventory planning can help reduce excess stock and improve inventory efficiency.
What Causes Excess Inventory?
Excess inventory can occur for a variety of reasons, some of them due to unexpected changes in the market, while others can be related to incorrect data or mismanagement of inventory. Here are some of the most common causes of excess inventory:
- Incorrect demand forecasting. Many times, excess inventory and resulting dead stock occur because of inaccurate or outdated demand forecasting, especially when customer demand keeps shifting. If a business does not invest in proper inventory planning that takes into account all necessary data points to generate accurate, up-to-date demand forecasting, it can end up with too much or too little stock on hand.
- Customer returns. When customers return goods, either due to holiday gift sales, faulty products, obsolete technologies, or other reasons, it can result in excess inventory.
- Seasonality. For businesses that experience strong seasonality, it’s crucial to adjust the inventory planning process accordingly, as seasonal shifts in demand can leave merchants with significant excess stock when the season ends.
- Marketing campaigns. Marketing campaigns like flash sales, and influencer campaigns can cause sudden shifts in demand that require immediate adjustments in demand predictions to align inventory purchasing.
- Abnormal shifts in demand. Bad reviews, macroeconomic shifts, and other abnormalities or market trends can affect customer demand overnight, leaving you with excessive stock levels.
- Supply chain complications. Overly complex supply chains, unreliable suppliers, or supply and warehouse shortages can all cause delays in supply. When this occurs, goods can arrive when demand is already gone, or businesses attempt to overcompensate for lag time to avoid stockouts, leading to the accumulation of too much stock when the orders finally get through.
What are the Risks Surrounding Excess Stock?
Excess inventory can have a variety of negative effects on your business. Here are a few of the biggest risks:
- Increased holding and carrying costs. Costs associated with holding excess inventory, such as warehousing, storage, insurance, and handling of excess stock, can quickly add up, increasing overhead and reducing cash flow.
- Missed opportunities. Holding excess inventory ties up capital that could be used in other areas of your business, such as marketing, new product investment, or expansion. It restricts your ability to introduce new products, respond to emerging trends, or adapt to changing customer preferences. If resources are tied up in costs associated with excess stock, you may miss out on potential revenue and growth opportunities.
- Product obsolescence and value depreciation. Excess inventory can quickly become obsolete or outdated, especially in industries like fast fashion, where rapid changes in trends and customer demand are commonplace. Products that are no longer in demand may end up needing to be liquidated at a significant discount, reducing revenue.
- Storage inefficiencies. Excess inventory occupies valuable space in warehouses, stockrooms, and brick-and-mortar stores, creating operational inefficiencies and limiting your ability to stock new products or optimize layouts.
Excess Inventory vs. Safety Stock
It’s important to make the distinction between excess stock and safety stock in the context of inventory planning and management. Having additional inventory beyond what matches previous sales data is not always a bad thing, and can be purposely done in order to account for a variety of potential situations or forecasted possibilities.
- Safety Stock. Safety stock is a planned amount of “buffer inventory” meant to reduce the risk of stockouts due to fluctuations in demand or supply. Safety stock levels are usually calculated to account for factors such as lead time inconsistency, supplier delays, seasonality, and forecasted spikes in customer demand.
- Excess Stock. Excess stock, or unnecessary overstock, on the other hand, is inventory that exceeds the current or anticipated demand for a product, usually resulting from inventory mismanagement. Mistakes such as overestimating demand, inaccurate forecasting, inefficient supply chains, or unexpected changes in market conditions can lead to excess overstock.
It should be noted that although safety stock is supposed to help businesses mitigate stockout risks, safety stock is also technically excess inventory–having too much safety stock can put your cash flow in danger. So, instead of applying a static safety stock ratio to all your products, it’s better to take a dynamic approach and calculate the right amount of inventory for each SKU, avoiding excess inventory and stockouts and maximizing cash flow.
How Peak Season Can Lead to Excess Inventory
One of the most common times that merchants end up with excess inventory is directly after retail’s peak season, which runs from October to January and represents the annual height of consumer spending and demand.
When the holidays are over, January discount sales wind down, and the inevitable influx of post-holiday returns occurs, many retailers and e-commerce businesses are left with a significant amount of unsold low-demand goods in their inventory. And while there are ways for businesses to liquidate unsold stock at the end of holidays through marketing promotions, customer giveaways and incentives, and bulk sales, the majority of these liquidation solutions recoup a percentage of the intended revenue, making them less-than-optimal options.
The best way to avoid too much excess stock, even after peak season, is through proper inventory planning and demand forecasting.
How You Can Reduce Excess Stock with Inventory Planner
Excess stock can occur for many reasons, especially for businesses with large catalogs of SKUs in rapidly shifting markets. Proper inventory planning that successfully avoids the strain excess stock can cause requires automated, reliable, and dedicated inventory planning software. That’s where Inventory Planner can help.
Inventory Planner automatically calculates what stock you need, how much to order, and when based on high-accuracy demand forecasts. It factors in critical variables like seasonality, customer demand shifts, promotions, and marketing campaigns for ultimate accuracy. It also offers an intuitive and up-to-date view of all your overstock items, including critical metrics like overstock units, overstock costs, and last sold date to help you liquidate costly excess inventory before it completely loses its appeal.
Inventory Planner integrates with your entire tech stack, including online sales channels, enterprise resource planning (ERP), warehouse management systems, accounting, inventory management, order management, and any other software you use, providing the most up-to-date demand forecasting based on your synced inventory and sales data. And with over 200+ meaningful metrics available, merchants can proactively identify trends and make data-driven purchasing decisions with confidence.
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