Excess stock is a common term used in inventory management for when inventory levels 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.
Excess stock levels are typically caused by three culprits:
Items will build up on warehouse shelves if you over-forecast the needs of the marketplace and order more inventory than you’re likely to sell. It’s therefore important to get your demand forecasts as accurate as possible. This involves identifying those with seasonality and upward/downwards trends and adjusting the forecasts accordingly. You also need to account for external factors, such as competitor activity, for example if your competitors drop their prices or launch a new product, this could lead to a drop in sales of you own products. Read more on inventory demand forecasting accuracy.
Inventory replenishment involves ordering the right amount of stock and the right time to meet forecasted demand. You can prevent a build up of excess stock by continuously adjusting your reordering points and quantities in line with supply and demand variables.
All products go through a life cycle – 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 if you fail to spot this you’ll 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.
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.
Businesses can sometimes falsely believe that excess stock is beneficial. In most cases it isn’t. Here are a few misconceptions put right:
Carrying excess stock levels has many cost implications. Below are three of the top reasons why you need a good excess stock management policy to ensure you keep inventory levels healthy at all times.
All types of inventory can be broken down into three categories:
Cycle stock: The inventory you plan to sell, based on demand forecasts.
Excess stock: When stock levels (plus safety stock) for a product exceed forecasted demand.
Obsolete stock: When stock remains in the warehouse but there is no demand (typically for at least 12 months)
Why not analyse your stock and categorise it into these segments? Understanding the current status of your inventory provides an initial insight into its health. Ideally, you should only be carrying cycle stock or ‘healthy’ inventory items that are purposely held to meet customer demand.
At EazyStock we offer a free stock health analysis service, where we’ll use our software to analyse your current stock levels and provide the above insights, as well as giving you valuable, actionable recommendations to make any necessary improvements.
Interested in learning how to drive down excess stock levels without the risk of stockouts? Contact EazyStock and schedule a demo to discover our excess stock management solution that will reduce inventory costs while increasing performance and profitability.