The causes of excess inventory

8 reasons you’re carrying too much inventory

What is excess inventory? Excess inventory occurs when stock levels significantly exceed expected demand. Carrying excess inventory might seem like a way to meet unexpected demand, but it comes with many disadvantages, especially when inventory turnover is slow. Operational inefficiencies and financial strain tie up capital, restrict cash flow, increase carrying costs, and amplify the risk of obsolete and dead inventory, eroding profit margins.

In this blog, we explore how businesses accumulate excess inventory and fall into the associated traps. Before delving into the root causes, let’s examine the signs of excess inventory.

How do I know if I have excess stock?

There are three simple signs that you have excess stock.

• Overcrowded warehouse

Overcrowded warehouses are the easiest way to identify excess stock. When items have little or no demand, they have a low turnover ratio, meaning they take up space for longer. This leaves less warehouse space for deliveries of items with upcoming demand.

• Financial pressures

Increased investment in slow-moving stock reduces available working capital and impedes cash flow. Less money is available to invest in other business areas, so you might need to delay other projects or take on debt to meet business objectives.

• Daily inventory management stress

An overcrowded warehouse and financial pressures create preventable challenges for inventory managers. Not only are they trying to get the right stock in to meet demand, but they’re also trying to get rid of excess stock. This can be tricky when there isn’t time to identify the root cause of the excess stock. Instead of reducing, excess stock levels increase along with the risk of stockouts, both of which increase financial pressures and stress.

Where possible, it’s helpful to classify your stock into non-stocked and stocked items to more easily identify where you have excess stock.

• Non-stocked items have low demand and, usually, high value. You should aim to hold no stock and order only when needed. Any stock of these items is excess stock.
• Stocked items have steady demand, so they need regular replenishment. Optimal stock levels for stocked items are the maximum stock levels – cycle stock plus safety stock. Anything beyond that is excess.

It’s important not to confuse excess stock with safety stock. Safety stock, or buffer stock, is a calculated level of stock added to cycle stock to cover unexpected demand surges or supply disruptions. These additional stock levels are calculated based on demand to minimize disruption to order fulfillment while investing the lowest possible amount of capital and avoiding excess stock.

What are the causes of excess inventory?

If you can’t figure out why your business has excess inventory, the following eight reasons could provide the answer.  

1. Poor forecasting methods

Inaccurate demand forecasts often lead to carrying too little or too much stock. Poor inventory forecasting usually stems from using the wrong forecasting tools. For example, you may be using spreadsheets that cannot handle complicated calculations, or you may be treating all items the same regardless of demand profile or product lifecycle stage. If your enterprise resource planning (ERP), inventory management system, or warehouse management system (WMS) lacks statistical demand forecast functionality, it’s time to consider how demand forecasting software can help.

2. Ignoring seasonality

Producing forecasts that ignore seasonal demand variations is another key reason for excess inventory build-up. If you’re using spreadsheets or rolling averages, you will struggle to spot seasonal patterns. Items have seasonal demand if they show recurring demand patterns over periods due to seasonal events, such as Christmas, Ramadan, Valentine’s Day, snow, or hot weather.

Failing to identify items affected by seasonal demand will lead to inaccurate forecasts. For example, if a store selling garden furniture to the US market bases its September forecast on the previous three months’ demand without accounting for seasonality, it will over-forecast and end up storing excess stock until the following spring (or selling it at a discount).

3. A lack of market understanding

Adding qualitative forecasting elements, or the ‘human factor’, to quantitative forecasts is essential for preventing overordering. Qualitative forecasting models incorporate opinions, experience, and market knowledge to provide a well-rounded perspective to your statistical forecasting.

For example, if the garden furniture store uses the best data-driven forecasting methods available, the inventory management team must identify new competitors taking market share or changes in trends affecting demand to avoid overestimating demand and ordering too much stock, which can lead to excess stock.

4. Product life cycle

All products go through a product life cycle, from market introduction through growth, maturity, and decline. At each stage, a product’s demand changes: it usually grows as the product establishes itself in the marketplace, stabilizes during maturity, and then becomes erratic and reduces as the product enters decline.

Many inventory planners fail to consider the product life cycle in their forecasts. This is particularly risky as products enter decline. If forecasts and reordering parameters aren’t adjusted to reflect falling sales, businesses can accumulate excess stock that quickly becomes obsolete if demand disappears altogether.

5. Aiming for high service levels

Sometimes, businesses end up with excess inventory because of deliberate actions and business decisions. Stock availability is a key factor in maintaining high customer satisfaction, but achieving target service levels and fulfillment rates often comes at the expense of balanced stock levels.

Businesses often hold too much stock to increase on-hand inventory and achieve high stock availability. For some inventory management teams, the fear of running out of stock leads to instinctive over-ordering.

6. Poor purchasing decisions

It’s easy to get carried away in supplier negotiations and bulk order offers, even when there is no demand. Before you know it, those bargains have taken over your warehouse and need to be sold at a discount or written off.

Supplier minimum order quantities (MOQ) can also cause problems when you order more than you need just to meet the restriction. For example, if you sell 20 items over a year but the MOQ is 60, you’ll end up with 40 excess items. You might sell those over the following two years, but they tie up money that could be spent now. However, demand could change, or they could become obsolete, leaving you with dead stock and costing you more in the long run. Choose your suppliers carefully, and consider expanding your supplier portfolio to secure the best deals for your order size and reduce this risk.

7. Supply chain disruption

With relentless supply chain disruption extending supplier lead times, many companies over-order to help mitigate the disruption, manage demand surges, and maintain customer service. However, buying large quantities of items regardless of demand to mitigate the risk of stockouts will result in excess inventory when the disruption eases. Appropriate safety stock levels are the better option here.

8. Complex supply chains

Businesses with multi-layered or multi-site supply chains often carry too much stock, usually due to decentralized inventory control and purchasing. Adding a little extra stock at each stage of an order to cover demand-forecasting inaccuracies or supply delays may seem negligible. However, when combined, these additions amount to substantial excess inventory throughout the supply chain.

How do I reduce my excess inventory?

Excess inventory can be very problematic, causing unnecessary operational and financial complications. If you relate to any of the excess stock trigger events above, our blog on how to reduce excess inventory provides a good starting point for change.

One way is to use inventory optimization software. Inventory optimization software like EazyStock can help get inventory levels back on track. It alleviates the pain of inventory classification and improves forecast accuracy with advanced statistical algorithms that consider product lifecycle demand and trends. EazyStock automatically calculates minimum and maximum stock levels without tying up unnecessary cash. It also automates calculations for reorder points, optimal order quantities, safety stock levels, and more, to improve your stock availability.

If you need help managing your excess inventory, get in touch with our team at EazyStock. We’ll conduct a stock health analysis of your current stock and identify healthy, excess, and obsolete items. We’ll then provide you with actionable recommendations to improve stock levels.

For more information, call +1 (844) 416-5000 or request a demo.