Excess Inventory & How to Avoid ItMay 1st, 2018
- Are There Advantages to Excess Inventory?
- The Costs of Excess Inventory
- The Causes of Excess Inventory
- The Hidden Costs of Excess Inventory
Read Time: 4 minutes
Having excess inventory can sometimes be an intentional business practice.
One use of excess inventory is in maintaining safety stock, which is used to cover unexpected spikes in orders.
But excess inventory can also be an unintentional, and even unknown, a symptom of poor inventory replenishment practices.
Whether it’s intentional or not, excess inventory may be one of the least understood costs a business may have.
Are There Advantages to Excess Inventory?
Businesses often consider excess inventory to be a good thing. After all, there are a number of advantages to being overstocked, right?
Higher Order Fill Rates
Having lots of inventory on hand means you are ready to fill each and every order. You’re justifiably proud of that 100% order fill rate. Customers come to you because they know they’ll always get the products they need.
Healthy Safety Stock Levels
You’ve been through it before. An unexpected surge in orders catches you short and you miss a lot of sales. Having lots of excess inventory means you’ll never be unprepared again.
Bulk Order Discounts
Who wouldn’t want to take advantage of lower price points by ordering more stock? You don’t just save on a per unit basis, but you cut your shipping and handling costs by moving larger quantities at a time.
Considering all the advantages, keeping excess inventory looks like a good idea. But there’s a problem. When a company focuses on the advantages of excess inventory, they fail to see the disadvantages, or extra costs it can involve.
The Costs of Excess Inventory
Even those businesses who knowingly keep excess inventory need to understand that there are added costs that go with it.
The basic cost of inventory is the capital that must go into purchasing the excess inventory. Not only does that mean an added outlay of capital, but it also means that the capital isn’t available for other areas of the business, like increasing sales to move all the inventory.
The Causes of Excess Inventory
For those businesses who don’t realize that excess inventory is causing them problems, the consequential costs can be even worse. One of the main reasons for those added costs is that one or more of the inventory management and replenishment systems they have in place doesn’t give them the information they need to avoid excess inventory.
When you don’t have the correct, real-time business intelligence, excess inventory can result.
Inaccurate Demand Data
Excess inventory can happen when a company orders stock to meet expected customer demands, but the demand changes.
If your sales forecasts are overestimated, you can be stuck with excess inventory and have no way to move it.
Inaccurate sales forecasting isn’t always about over- or underestimating order quantities. Product specifications can change in a flash and if your forecasts fail to anticipate those changes, you will have excess inventory on your hands
Inaccurate Inventory Management Data
Tracking and managing inventory information is crucial to avoiding being overstocked. If you don’t have accurate, real-time inventory information, how can you reliably maintain optimal inventory levels?
Poor Inventory Replenishment Practices
Inventory replenishment is a science that all businesses should strive to master if they want to maximize their profitability. Yet many businesses still use obsolete ‘set-it-and-forget-it’ replenishment practices that can result in excessive inventory for in many different ways.
Among other things, an effective inventory replenishment policy will include the following:
Maintenance of optimal inventory levels
This is the level of inventory you need to meet your commitments to your customer, plus a reasonable safety stock.
Regular inventory reviews
Regular reviews of actual inventory levels, especially when very large amounts of inventory are on hand, can help you avoid excess inventory.
Realistic reorder points
While set-it-and-forget-it can work in for many SKUs, you need the insight into changes in customer demand and inventory supply to make sure your reorder points aren’t stocking you up on product that isn’t selling.
The Hidden Costs of Excess Inventory
Regardless of why you have excess inventory, or whether doing so is part of your business model, there are many hidden costs to it. In some cases these are the largest costs. And they may be unknown, or even unknowable, because a company does not have the business intelligence to reveal them, track them and takes steps to avoid them.
Every business must know the hidden costs of excess inventory and poor inventory replenishment practices before they can make informed decisions about keeping extra inventory.
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