Below we’re going to investigate why businesses end up with too much stock in the first place and why they get caught out by excess inventory traps.
But first, let’s get a reminder of what excess inventory actually is:
Excess inventory is when stock levels for an item exceed their forecasted demand in an uncontrolled manner. Carrying excess inventory is inefficient and has operational costs and financial implications. These include tying up much needed capital, increased carrying costs and a risk of stock obsolescence. Be careful not to confuse excess stock with safety stock, where additional levels of stock above the forecasted demand are calculated and deliberately ordered.
Does your business have excess inventory but can’t work out why? Here are eight reasons why you’re consistently over-stocking.
Inaccurate demand forecasts often lead to carrying too little or too much stock. Poor inventory forecasting is usually due to not having the right tools for the job e.g. you lack adequate demand forecasting software or are trying to use spreadsheets for complicated calculations. This may be because your enterprise resource planning (ERP) or warehouse management system (WMS) lacks the sophistication to carry out statistical demand forecasting.
Producing forecasts that ignore seasonal demand variations is another key reason for a build-up of excess inventory. If you fail to identify items that are affected by seasonal demand, your forecasts for these items will never be accurate. For example, if a store selling garden furniture to the Midwest market bases its September forecast on the previous three month’s demand, without accounting for seasonality, it will over-forecast and end up storing excess stock until the following spring (or selling it off at a discount).
Adding qualitative forecasting aspects, or the ‘human factor’, to every forecast is very important to prevent ordering too much stock. For example, even if the garden furniture store uses the best data-driven forecasting methods available, if the inventory management team fails to identify new competitors eroding their market share, their demand projections will over-promise and they’ll find they’re left with excess stock.
All products go through a product life cycle, from market introduction, through growth, maturity and decline. At each stage a product’s demand will change e.g. demand usually grows as products establish themselves in the marketplace, it stabilizes during maturity and then often becomes erratic and starts to taper off as the product enters decline.
Many inventory planners fail to recognize or take account of the product life cycle in their forecasting. This is particularly risky as products enter decline and demand drops off. If forecasts and reordering parameters aren’t adjusted to mirror the falling sales, businesses can be left with excess stock which can quickly become obsolete if demand disappears altogether.
So far this blog has focused on how elements of poor demand forecasting can cause excess stock situations. But sometimes businesses end-up with excess inventory ‘on purpose’ due to their own actions and business decisions.
Businesses often come to us and explain that they’re holding too much stock because they want to achieve high levels of stock availability. For some inventory management teams the threat of running out of stock leads to them to instinctively over-order. Stock availability is a key ingredient to helping businesses maintain high levels of customer satisfaction. But often hitting service levels and fulfillment rates is done at the expense of carrying too much stock.
It’s easy to get carried away in supplier negotiations and focus on getting the best price for every order. One way to do this is through bulk buying. Sometimes the lure of an excellent cost per unit price is too much to resist and before you know it, your warehouse is full of items you ‘bought for a bargain’ without there necessarily being demand for them.
Since the coronavirus pandemic, many companies have over-ordered on stock to help alleviate supply chain disruption and deal with demand surges. With no one knowing how long the pandemic will continue impact supply chains, many businesses are forced to buy surplus stock to mitigate the risks. When things begin to return to some kind of ‘normal’ businesses will, however, find they have excess stock and will be looking to lower their inventory levels accordingly.
Business with multi-layered or multi-site supply chains often find they carry too much surplus stock. This is often due to decentralized inventory purchasing, where at each stage of the supply chain a little extra stock is added to an order to cover any inaccuracies in demand forecasting or delays in supply. The result is a surplus in stock at each layer of the supply chain which in isolation maybe small, but added together amounts to substantial excess inventory.
Excess inventory can be very problematic, causing operational and financial complications that most businesses could do without. If you suspect you have excess inventory, then consider getting in touch with our team at EazyStock. We offer a stock health analysis service where we’ll analyze your current stock and identify healthy, excess and obsolete stock items. We’ll then provide you with a list of actionable recommendations to make the necessary improvements.