EXCESSIVE INVENTORY: Definition, Cause and Guide to Reduce It

EXCESSIVE INVENTORY
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Sometimes inventory does not sell as quickly or as well as planned. Certain items may remain on the market for months due to a lack of consumer interest or knowledge about the product. These items eventually reach the end of their life cycle without being sold and are classified as excess inventory. So, what do you do when your online store has too much inventory? And how does excess inventory affect distribution? Continue reading to learn about the causes, examples, and costs of excessive inventory, as well as a few targeted steps on how to reduce excess inventory waste in your warehouse.

Over time, this excess stock becomes obsolete and no longer has any value for your company. As you might expect, having your inventory depreciate is not an ideal situation; the disadvantages of having too much inventory include more waste, higher carrying costs, and lower profit margins.

What Is Excessive Inventory?

Excessive inventory refers to goods that have reached the end of their product life cycle but have yet to be sold, causing their projected demand to exceed their actual demand. Surplus inventory, in general, has been sitting on warehouse shelves for a long time and is unlikely to sell anytime soon.

Excess inventory typically indicates poor stock demand management as a result of factors such as supplier constraints, inaccurate forecasting, and inefficient inventory management—i.e., overbuying, canceled orders, and so on. Fortunately, with advanced inventory management solutions, brands can better maintain (and move) their stock so that it does not depreciate and lose value.

Causes of Excess Inventory

Excess and obsolete inventory can be caused for a variety of reasons. Poor purchasing decisions can lead to carrying excess inventory in addition to not having an accurate idea of inventory levels and selling slow-moving products.

Here are some of the most common causes of excess inventory for high stock levels:

#1. Improper Forecasting Methods

Inaccurate demand forecasts frequently result in carrying either too little or too much stock. Poor inventory forecasting is typically caused by a lack of appropriate tools for the job, such as a lack of adequate demand forecasting software or attempting to perform complex calculations using spreadsheets. This could be due to a lack of sophistication in your enterprise resource planning (ERP) or warehouse management system (WMS) to perform statistical demand forecasting.

#2. Disregarding Seasonality

One of the major causes of excess inventory is the production of forecasts that ignore seasonal demand variations. If you fail to identify seasonal demand items, your forecasts for these items will never be accurate. For example, if a store selling garden furniture in the UK bases its September forecast on the previous three months’ demand without taking seasonality into account, 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 Knowledge

Lack of market knowledge is one of the causes of excess inventory.

It is critical to include qualitative forecasting aspects, or the “human factor,” in all forecasts to avoid ordering too much stock. Even if the garden furniture store employs 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, leaving them with excess stock.

#4. The Life Cycle of a Product

Every product goes through a product life cycle, which includes market introduction, growth, maturity, and decline. The demand for a product will change at each stage. Demand typically increases as products establish themselves in the market, stabilizes during maturity, and then become erratic and begins to decline as the product enters decline.

#5. Strive For High Levels of Service

This blog has so far focused on how elements of poor demand forecasting can result in excess stock situations. However, businesses can end up with excessive inventory “on purpose,” for example, as a result of their actions and business decisions.

Excess Inventory Examples

Assume John Doe Inc. is a cookie manufacturer. John Doe bakes 10,000 cookies that he will be unable to sell after November 30. They cannot sell them after that date because they are no longer edible. In other words, their expiration date is November 30th.

By November 30th, John Doe had sold 7,500 cookies. This means that they are unable to sell 2,500 cookies. Those 2,500 cookies are excess inventory. When a company discovers dead inventory, it must write it off. This is a requirement of GAAP. GAAP is an abbreviation for “Generally Accepted Accounting Principles.”

Businesses can try to resell obsolete products at a loss or donate them to charity. However, looking for a buyer for cookies after their sell-by date would most likely be illegal for John Doe.

GAAP requires businesses to set up a reserve account on their balance sheets for excess inventory. They deplete the reserve funds by disposing of obsolete goods. This has the potential to significantly reduce profits. Indeed, obsolete inventory can result in significant losses.

How Can Distribution Be Affected by Excessive Inventory?

Excessive inventory can be detrimental to your business or company. Continue reading this guide on how excess inventory can affect distribution to gain a better understanding of why this is the case.

#1. Your Profits are Decreasing

Most businesses want to get rid of excess inventory as soon as possible. They may accomplish this by placing their product on sale or clearance to entice clients and customers to purchase the product. Unfortunately, these excess products are frequently purchased at a lower price than they are worth. This is why profits fall when a company has too much inventory.

#2. The Cost-Benefit Relationship of Storage Space

A company must not only find a way to store excess inventory, but they must also find the money to store it properly. This excess inventory takes up space in the inventory that could be sold at a faster, more productive rate. It costs the company money to move and manage the products, in addition to taking space away from better-selling items.

To do so, the company must also consider the utilities and expenses. No business owner wants their employees to waste time moving and organizing excess inventory when they could be doing more beneficial tasks for the company’s success.

#3. Products are Wasted

An even bigger disadvantage of having excess inventory is that some products simply go bad. Many products with expiration dates must be discarded because they are no longer usable and cannot be sold for a profit. Companies that sell products or other food items should never keep the excess inventory in storage for an extended period, as it will go bad.

While most businesses keep excess inventory as an accident, businesses should do everything possible to avoid this. When you consider how excess inventory can affect distribution, it is easy to see how detrimental the practice can be to your business or company. Take the necessary precautions to avoid such scenarios.

Excessive Inventory Costs

Consider the costs associated with purchasing, storing, and selling merchandise in your business. Freight-in, storage costs, insurance expenses, external or internal theft, obsolescence, spoilage, and taxes are examples of these.

According to studies, the annual additional cost of holding excessive inventory can range from 25% to 32%. Let’s round that up to 30% for ease of calculation. When you keep more inventory than you need, your income statement suffers from two factors: a lower gross margin and higher operating expenses. Both of these things reduce your operating profit.

If you have an excessive inventory, you will incur additional, and most likely unanticipated, selling and advertising costs to sell the excess merchandise. These additional costs will reduce operating profits.

For example, if you spend 4% of your sales on advertising, 25% of which is devoted to moving out excess inventory, the one percent of your sales volume saved (25 percent of 4%) becomes increased profits.

How to Reduce Excessive Inventory Waste

The best way to avoid and reduce excessive inventory waste is to buy only what you know you’ll use. This can be accomplished by reviewing your historical data to determine seasonal trends, calculating usage, and identifying your best-selling products. Then, to avoid overordering, determine the proper par level.

These figures show you how to maximize your profits while you reduce or minimize losses due to excessive inventory and waste. Because the numbers are at your fingertips 24/7, using a Google Sheets inventory template, bar inventory app, or barcode scanner app for inventory makes this simple.

If you already have excess inventory, the key will be to find ways to reduce excessive inventory waste without incurring losses. One way to investigate this is to perform recipe costing to ensure you’re making the best use of your stock.

Merchandise liquidation is another option to reduce excessive inventory waste. Selling liquidation merchandise or large quantities of excess inventory to restaurant wholesalers at reduced prices is an excellent way to reduce inventory.

How to Dispose of or Sell Excess Inventory Fast

There are a few options for selling excess inventory in the restaurant industry without incurring a loss.

  • Look for other uses for the products: Have you got ingredients that are about to spoil? Use menu engineering to create a new drink or dish that incorporates them. This could even be one of your restaurant’s marketing strategies. Call them specials or limited-time offers to boost demand and clear excess inventory.
  • Offer it for sale during happy hour: Cutting the price of a product is a tried and true method of increasing demand. Happy hour is a classic bar promotion that allows you to limit price cuts while increasing demand. You can accomplish the same thing with an LTO food promotion. Discount prices will not yield as high a return, but they are an excellent way to move products that are nearing the end of their useful life.
  • Give it to a worthy cause: Any nonalcoholic items you have in excess may be useful to a non-profit organization. Donations have tax advantages for your business, even if you don’t see an immediate return. Not to mention that you will increase goodwill in your community.

Why Is Excess Inventory Bad?

Stock obsolescence can result from excess inventory.

Excessive inventory is usually caused by poor forecasting and purchasing, such as overestimating demand and/or purchasing too many of the wrong items. If demand for those items falls below zero for an extended period, the result will be obsolete stock.

What Happens When You Have Too Much Inventory?

Excess inventory can result in subpar goods and degradation. If you have a lot of excess stock, you probably have a low inventory turnover, which means you’re not turning all of your stock regularly. Unfortunately, excess inventory on warehouse shelves can deteriorate and perish.

What Causes Excess Inventory?

Overbuying, inaccurate projections, canceled orders, a bad economy, unforeseen weather changes, unpredictable consumer demand, or late or early delivery of goods are all common causes of stock demand mismanagement.

Consequences of Too Much Stock

The most obvious effect of stockouts is revenue loss. If a customer attempts to place an order and the item is out of stock, you forfeit the sale. Customers may choose less expensive items. Worse, you may lose a customer for good, resulting in fewer recurring sales in the future.

Advantages of Excess Inventory

Pros to holding excess inventory:

  • Faster response time.
  • Reduced risk of shortages.
  • Rapid replenishment
  • Cash flow is being constrained.
  • Inventory is at risk of becoming obsolete.
  • There is a chance that the item will not sell.
  • Increased storage costs.
  • Natural disasters pose a threat.

Disadvantages of Too Much Stock

One of the most significant disadvantages of excess inventory is revenue loss. Products depreciate and lose their initial value over time. As a result, the longer you keep a product, the cheaper it becomes.

Conclusion

One of the major causes of excess inventory is poor purchasing decisions, which can lead to carrying excess inventory in addition to not having an accurate idea of inventory levels and selling slow-moving products.

Excessive Inventory FAQs

How do you handle excess inventory?

Methods for Dealing with Excess Inventory:

  • Return the item for a refund or credit.
  • Shift inventory to new products.
  • Commerce with industry partners.
  • Sell to customers. 
  • Consign your item.
  • Excess inventory should be liquidated.
  • Auction it yourself. 
  • Scrap it.

What is extra inventory called?

Excess inventory, also known as overstock, is inventory that has not yet been sold and is not expected to be sold. In other words, supply exceeds demand.

Is it better to have a high or low inventory?

In general, the higher the ratio, the better. A low inventory turnover ratio may indicate poor sales or excess inventory, also known as overstocking. It could indicate a problem with a retail chain’s merchandising strategy or insufficient marketing.

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