The Causes of Excess Inventory
- 8 reasons why you're carrying too much inventory
- Excess inventory – a definition
- What are the causes of excess inventory?
- 1 Inadequate forecasting methods
- 2 Ignoring seasonality
- 3 A lack of market understanding
- 4 Product lifecycle
- 5 Aiming for high service levels
- 6 Poor purchasing decisions
- 7 Brexit
- 8 Complex supply chains
- How can you mitigate the causes of excess inventory?
- Do I have excess inventory?
8 reasons why you’re carrying too much inventory
In some of our recent blog posts we’ve looked at the disadvantages of carrying excess inventory and how to reduce excess inventory. 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 – a definition
Excess inventory is when stock levels for an item exceed their forecasted demand in an uncontrolled manner (not to be confused with safety stock, where additional levels of stock above the forecasted demand are deliberate and calculated). Carrying excess inventory is inefficient and has a number of operational costs and financial implications. These include tying up much needed capital, increased carrying costs and a risk of stock obsolescence.
What are the causes of excess inventory?
Does your business have excess inventory but can’t work out why? Here are eight reasons why you’re consistently over-stocking.
1. Inadequate forecasting methods
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.
2. Ignoring seasonality
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 UK 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).
3. A lack of market understanding
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 utilises 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.
4. Product lifecycle
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 stabilises during maturity and then often becomes erratic and starts to fall-off as the product enters decline.
Many inventory planners fail to recognise 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.
5. Aiming for high service levels
So far this blog has focused on how elements of poor demand forecasting can cause excess stock situations. But sometimes businesses end-up with excessive inventory ‘on purpose’ e.g 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. Product availability is a key ingredient to helping businesses maintain high levels of customer satisfaction. But often hitting service levels and fulfilment rates is done at the expense of carrying too much stock.
6. Poor purchasing decisions
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.
2019 saw many companies over-order on stock in reaction to the UK’s plans to leave the EU. With no-one knowing the full impact that Brexit will have on their supply chain, inventory management teams were forced to buy surplus stock to mitigate the risks. With the likelihood of changes to trading laws not taking affect until 2021 at the earliest, some businesses will find they have excess stock and will be looking to lower their inventory levels accordingly.
8. Complex supply chains
Business with multi-layered or multi-site supply chains often find they carry too much surplus stock. This is often due to decentralised 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.
How can you mitigate the causes of excess inventory?
Excess inventory can be very problematic, causing operational and financial complications that most businesses could do without. If you relate to any of the excess stock trigger events above, then reading our blog on how to reduce excess inventory is a good starting point to change.
Do I have excess inventory?
If you suspect you have excess inventory, then consider getting in touch with the team at EazyStock, We offer a stock health analysis service where we’ll analyse 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.
For more information call 0121 312 2992 or request a call back.