What is Excess Inventory?
Do you know what is excess inventory? Excess inventory refers to products that sell slow and exceeds the market demand of that particular product. Economically, excess inventory relates to several significances such as late stock delivery and when that happens, there is nothing you can do other than come up with strategic ways to deal with the situation. However, some retailers keep excess inventory having in mind that it results in substantial profit after some time. For instance, some businessmen keep excess stock for as long as they can with the intent of selling at a full price when the right time approaches. That is an incredible idea because it may result in massive returns. The only downside to the idea is that you are never sure a time will come when you have the opportunity to release the products at your intended cost. It may take a while, and you do not have much time to wait for profit. You can never predict the trend of the market for a whole season. Factors such as sudden weather changes could cause a demand shift that you did not see coming. Though having excess inventory is a downside for every business owner, it is not necessarily an unbeneficial idea. Frankly, businesspersons or organizations never plan to overstock their shelves with goods that are in less market demand. Unless it is the effect of overbuying with some smart idea in mind, you can suffer from excess less demand stock unexpectedly.
Causes of Excess Inventory
- Late Product Delivery
Late commodity delivery is common. According to evidence-based research on the downsides of surplus stock, 60% of excess inventory situations are as a result of shipment delays. Processing procedures and international regulations can result to the holding of commodities at seaports and airports for several months, and since the market does not wait for goods from a specific businessperson, your products become invalid as time passes. Factors such as bad weather or technical issues may delay your stock when it is in high demand. By the time you get your hands on the expected stock, market demand may be lower than it was at your time of purchase. The goods, therefore, end up piling your shelves and bringing minimum or no profit.
- Bad Prediction
Bad prediction is one of the leading causes of excess inventory. Every company, organization or small business uses different strategies to predict the trend of the market. Unfortunately, most of the strategies are basic and causes huge losses when the market trend takes a sudden shift. The bad prediction comes with insignificant forecast models and average calculations. The market can be complex at times and use average ordering models together with basic calculation tools is not a smart business idea.
- Excess Stores
Some business partners have too many stores serving the same or proximity locations. Working with several supply chains contributes to market transparency but securing more than enough warehouses in locations that you could use only one store is not beneficial because you end up buying too many commodities to fill the shelves of all your stores. If you have a store big enough to serve a specific population, fill it with your intended products and observe the cash flow before opening another warehouse with the intent of selling the same products. However, many business owners have the mentality that if one store is invisible to clients, other additional warehouses saves the day. Therefore, they end up purchasing in bulk to stock two or more stores.
- Deprived Inventory Management
At times, the surplus stock is a matter of carelessness in the management department. The members of the management department are responsible for ordering commodities, making transactions, making purchasing changes and other tasks related to sales. Any form of disorganization in the management sector leads to undesired consequences. When there is discoordination among the members of the inventory management, overbuying is likely to happen due to errors in inventory records and poor communication among the sales individuals. For instance, one wrong numerical figure in the future purchase spreadsheet such as 1000 products instead of 100 leads to excess inventory.
- Unreliable Suppliers
Unreliable supplies cause many inconveniences. You may order commodities early enough, but your supplier inconveniences you by holding the goods for an unknown period. That means you have to purchase excess commodities to cover for the uncertainty. It is important to find a reliable and consistent supplier throughout the year to avoid buying products in excess for covering up the profit loss that occurs during the waiting time.
- Ignorance of Slow Moving Inventory
One reason a business may be making losses is due to ignoring the slow-moving inventory. Many business owners ignore the less profitable commodities and continue keeping them on the shelves with the thought that they do not affect the attained profit. As much as other products could be selling fast and bringing in most of the profit, there is a need to recheck the store and get rid of old and excess less profitable products. Otherwise, you end up piling goods that do not appeal to your targeted customers.
- Sudden Product Changes
Manufactures alter their products from time to time without notifying wholesale buyers. Suppose you order products on a wholesale, and the manufacturer alters the product before delivery, you are likely to experience excess inventory. It is the nature of all consumers to purchase innovated products because they prefer better quality than before. If that happens before you sell all the initial commodities, you end up having too many products that are invalid.
- Calculating Excess Inventory
You may be unsure of which products are causing slow cash flow. Since mathematical calculation provides factual figures, get your calculator and pen to save your business. First, find out the cost of the goods you already sold. Next, calculate your average inventory by finding the sum of all the inventory costs and diving by the appropriate number. For instance, a+b/2 gives you an average inventory for two selling periods. Last take your cost of goods and divide by the average inventory. The figure you get should imply whether particular commodities are less profitable. The higher the figure, the more successful the business. A low figure means you have to countercheck and get rid of the items reducing your cash flow.
How to turn Excess Inventory to a plus for the business
- Stay safe
The good thing about this nightmare is that there are possible methods that you can use to evade them. The bad news is that these strategies need a flexible mind to try out every new idea that pops up as long as it does not affect the productivity of the business. By staying safe in the industry, it means that all your commodities need to be on the move because the more a certain type of product stays in the store, the higher the chances of welcoming excess inventory in your firm.
- Sale in bulk on discounts
Research is fast to prove the fact that customers like to be part of the business in all possible ways and the more clients get in contact with the operation of the business, the better the chances of increasing the economies of scale of the business. One way to do so is by offering goods and services on discount so that clients can also get the idea that the business is considering their tastes and preferences, as well financial abilities to maximize on the economies of scale of the business.
- Create leverage on all products
When most of your commodities have been inhabiting the warehouse for far too long without any signs of selling out soon, it is wise to consider leveraging all of them. A good way to do this is by asking friends and relatives to spread the word about the quality of your goods and services for a little tip or favor like a t-shirt with the company’s brand on it or access to some of the most exclusive services of your firm. Through this method, it is likely that you will reduce the excess inventory.
- Liquidate your assets
The good thing about liquidating your assets is that you stand a higher chance of increasing your profits as opposed to letting them stay in the warehouse for far too long. Auctioneers can take advantage of such situations and increase the value of your products by the passage of every minute. The simple truth is that your excess inventory has a better chance of attracting customers when you change your target audience and location. Rebranding plays a big role in helping expose your inventory to potential consumers across the whole board.
- Consider the role of subscription boxes
You can solve the menace of excess inventory by offering them as prizes for customers to win when they spend a certain amount of money in your organization. Most clients will develop the urge to know what is waiting on the other side of the subscription more so if a lot of people have been talking about it. Rather than using the subscriptions for the sole purpose of your business, you can choose to diversify the scope of operation. Through spreading your risks, you stand a chance of enjoying more rates of returns as compared to channeling it one source.
There are so many ways that you can reverse the analogy of excess inventory to work well in your favor despite having had experiences in the past. The bottom line is, whether you are in production or distribution or whichever field of business, you are bound to face the implications of excess inventory. However, there is new hope for solving this issue such as through the use of software that can do all the work for you using as much minimal effort as possible.