The Challenges of Excess Stock in Your Inventory
- What is excess stock?
- Excess inventory and the product lifecycyle
- Common misconceptions of excess stock
- Disadvantages of excess inventory
- Need help reducing excess stock levels?
Excess stock is a common term used in inventory management for when stock levels for a product exceed forecasted demand. Excess stock is also known as overstock, stock surplus, excessive stock, or excess inventory. But, no matter what you call it, one thing that remains constant is the threat it represents to your company’s bottom line. This blog takes a closer look…
What is excess stock?
Excess stock levels are typically caused by three culprits:
- Poor demand forecasting
- Inaccurate replenishment tactics
- Lack of product lifecycle tracking
Excessive stock levels have many cost implications. First off, there’s the lost revenue associated with products that may never sell (obsolete stock) due to little or no market demand. Then there’s the capital tied up in the original purchase of the goods, and finally there’s the costs associated with storing the inventory, often referred to as carrying costs.
Excess inventory and the product lifecycyle
All products go through a lifecycle – from market introduction, through maturity, to decline. Excess inventory often occurs during the declining stage of the product lifecycle, shown in the graph below. Whilst there’s still typically demand for the product, it’s beginning to phase out and organisations that fail to spot this will continue to order based on previous demand patterns. Inventory planners that cannot actively monitor the demand stages of their SKUs run the risk of getting stuck with a large quantity of excess stock, due to inaccurate forecasting. Read more on inventory demand forecasting accuracy.
In a best case scenario, a company can hope to sell off most of the excess stock and break-even on their investment or only lose a small percentage of profit. But if excess stock is not liquidated, it typically transitions to obsolete stock, which almost always leads to a large and painful expense on the books.
Common misconceptions of excess stock
Businesses can sometimes falsely believe that excess stock is beneficial. In most cases it isn’t. Here are a few misconceptions put right:
“Excess stock achieves higher service levels (order fill rates) – efficiently”
Always having inventory on hand means always having products to sell when there are opportunities – right? Whilst this may seem like a logical thought process, many businesses stumble by tying up too much capital in excess stock to guarantee product availability. Having a 100% fill rate on all products is not always the smart thing to do when you’re trying to effectively manage your inventory costs and stock turnover. Smart inventory planners know they need to balance having low levels of inventory while also ensuring products are available to meet demand. At EazyStock we call the process of achieving low inventory levels while maintaining a high service delivery level inventory optimisation.
“Excess stock allows higher safety stock levels (buffer stock)”
Don’t confuse excess stock with safety stock. They are not the same thing! Safety stock is a strategic and calculated level of stock that helps reduce the risk of stockouts due to unknown situations, such as variable supplier lead times or demand fluctuations. Effective safety stock levels ensure there’s always inventory available to meet sales demands and keep customers happy.
Levels of safety stock are adjusted based on demand forecasts, seasonality variances, trends, supplier lead times and a product’s place in its lifecycle. This ensures a business is not left with excess stock. Companies that leverage inventory optimisation software, such as EazyStock, have the ability to more accurately calculate safety stock to ensure excess stock is avoided.
“It’s worth having excess stock for bulk purchase savings”
Most businesses will see savings when purchasing supplies in bulk quantities. They can also save on shipping costs e.g one large order is cheaper than adding up shipping and handling costs from multiple smaller batch orders. However, committing to large quantities comes with the risk of demand uncertainty for every product ordered.
Companies that can intelligently forecast their demand and strategically optimise their replenishment processes will see greater cost efficiencies, without burdening themselves with orders too large. The key is to find the optimal time when an item must be reordered and in what quantities to ensure a continuous balance of inventory to meet demand. All whilst ensuring inventory isn’t piling up in stock locations. Read our whitepaper on replenishment to find out how to set the most cost-effective reordering times and quantities.
Disadvantages of excess inventory
Below are three of the top reasons why you need to continuously monitor your stock levels against your product lifecycles to ensure you keep inventory levels healthy.
High opportunity costs
If you hold excessive levels of inventory it ties up business funds that could be invested in other areas, such as research and development or marketing. The cost of the inventory is not recouped
until it is sold, and the longer this takes, the longer working capital remains unavailable.
Increased carrying costs
The cost of warehousing can include the warehouse space, utilities and maintenance of the storage area. Some stock may also require additional maintenance, such as temperature control to preserve the quality of the material. Excess stock of slow moving products eats up space in your warehouse when you could be holding higher demand products instead. Inventory levels can be reduced by up to 30% by simply improving forecasting methods and replenishment practices.
Quality reduction & product degradation
Storing items for longer than anticipated can lead to quality problems. In these situations, businesses may need to sell off stock at a reduced price or purchase new materials as replacements – both of which can be costly.
Need help reducing excess stock levels?
Interested in learning how to drive down excess stock levels without the risk of stockouts? Contact EazyStock to schedule a demo to discover how easy it is to drive down costs while increasing inventory performance and profitability.