There are many performance indicators in inventory management, the main ones are inventory levels, sales, surplus, lost sales, availability percentage, and inventory turnover. If the estimation of sales and turnover is not a problem, with an inventory surplus, it is more complicated. A retailer's often-heard opinion is, “Surplus inventory is the supplier's money.” It makes us feel that the overstock indicator can be put on the back burner.
So, we delved into the excess inventory issue and realized that its effect on the business was profound. How does financial performance depend on surplus stock, and why is overstock not only the supplier's problem? Let's figure it out.
Key Takeaways
Understanding surplus prevents tying capital into unproductive stock.
Surplus isn’t just excess — includes wrong mix.
Damages cash flow & storage.
Regular audits reveal hidden surplus.
Discount or bundle to clear.
Prevention starts with better planning.
Retail Inventory Management Challenges. Why Is Surplus Inventory Important?
Among the current inventory management issues, some most common ones emerge. All of them are related to excess inventory, either directly or indirectly. Studying their causes and effects in detail, we find that excess stock is not only the supplier's lookout but also a real problem for retailers, which is often turned a blind eye.
In many companies, it's store managers who still handle orders instead of the central office.
In such circumstances, inventory planning and management becomes entirely uncontrollable. Orders become dependent on the opinion, expertise, and even the mood of this or that manager. There is often a lack of coherence or a consistent approach to inventory management. The manager tends to form "outsized" orders since the operating staff is better motivated by the sales rate than by inventory turnover.
There used to be a practical case when managers in a retail chain not only formed orders but also negotiated prices with suppliers. As a result, the same goods were delivered to different stores at different purchase price. Of course, such an organizational set-up option has actually become outdated. However, it reveals the influence of operating personnel on financial performance may lead.
Lack of category A fast-moving products and excess inventory of other products with lower consumer demand.
There is also a race for profit margins due to well-known manufacturers, own imports, and the development of their own brands. In this race, lost sales are unacceptable, although inevitable, and range from 5 to 30 percent for different chains.
High payroll expenses.
This applies to operating personnel in stores and to IT specialists. In some retail chains, IT departments appear to automate inventory management processes or other areas in the company.
Retailers have to launch new projects and streamline their business experience to solve new problems. The company needs a budget for this, and that's just what working with the surplus wanted. Excess stock is a problem holding really great promise. Their reduction always releases the company's money frozen in goods. Here, the initiative and responsibility for minimizing surplus rests entirely on the chain and not with the suppliers. So, the first thing a retailer should do is determine the level of surplus inventory across the chain and compile a list of SKUs that belong to this category.
The surplus inventory is calculated as per the following formula:
It is also important to determine the shelf space margin per shelf meter – the indicator reflects several factors at once:
- product mix accuracy and potential;
- correct display;
- shelf replenishment matrix performance.
Excess products increase inventory costs, which can cause margins per shelf meter to deteriorate. Next, we will analyze this point in detail.
Having defined excess stock in specific numbers is important to understand how painful it is for a business and what exactly it affects.
Effect of Budget Cycle
Few people consider this aspect since there is a belief that the store inventory is the supplier's stock and money. So, it's not a problem if the inventory turnover is less than the delay period. What is more, we usually consider the entire chain indicators, but what if we look at each separate product? When we analyze our customers' experience, the “inventory is the suppliers' concern” assertion is not suitable for most products and does not apply at all to the following categories:
- domestic import;
- domestic production;
- products which turnover is more than the delay period.
If overstock goods turnover is greater than the delay period, this means direct economic loss. In this situation, it will be necessary to attract financial capital for the development of the network as loans or other sources.
Inventory turnover acceleration is the ability to use your cash to scale and launch new projects faster by releasing funds from inventory.
According to the statistics that we collected using the LEAFIO Inventory Optimization solution, the inventory turnover without a extra inventory is 2-3 times better.
Effects of surplus items on inventory turnover
It is obvious that too much surplus inventory costs money for the company, not for suppliers, as many believe. If we multiply the theoretically optimized surplus inventory by the % of loans or by the average cost of money for the company, we get the amount of cash released. Sometimes the numbers are quite impressive.
If you want to analyze your business by its key areas, we suggest downloading a handy checklist. With it, you can assess your inventory management, merchandising, and loyalty program and then draw up a plan to optimize business processes.
Effect of Surplus on Logistics and Their Expenses
Hardly anybody considers logistics expenses through the lens of overstock indicator. Although the inventory logistics expenses with and without excess inventory differ due to three parameters:
- Inventory storage. The longer the product is in a warehouse or on a store shelf, the more it costs the company. Products may become out of code or lose their appearance, which can also have a negative effect.
- Interplant transfer. It also consumes a certain resource, both transport and human.
- Returns. We mean physical transport logistics, which also requires financial investments in the chain.
Imagine logistics as inventory following down the tunnel from point A to point B. While the inventory is within, the retailer incurs logistics expenses. That is why, in a perfect picture of the world, inventory should arrive quickly and sell out immediately so that there are no logistics expenses. However, this is not actually possible, and we have to understand the logistics expenses and how they affect the final margin.
How does surplus affect the cost of logistics? Let's perform some hypothetical calculations.
An average inventory indicator across the chain is 100. Of these, category A product accounts for 20, and category B - for 80. Let's say they sell the same per day – 1 unit per day. From here, we can calculate the turnover: category A has 20 days, and category B - has 80.
Now let's imagine that the total logistics expenses across the chain are 5% of the cost (remember that the average inventory indicator is 100). Then for category A products, this indicator will be 2%, and for category B - 8%. Let's remember these numbers.
Now let's see the difference in terms of marginality. Let's say that the mark-up for category A and B products is the same and amounts to 25%. We can subtract 5% (average chain logistical costs) and get the same figure – 20%. But if you differentiate the products, these indicators will be noticeably different:
category А: 25% — 2% = 23%
category B: 25% — 8% = 17%
As you can see, the margin of goods without surplus will be higher. Therefore, this factor should be taken into account, even if everything is on consignment or with a delay of payment.
Effect of Surplus Inventory on Sales
We have already found out that the company's cash flow depends on how quickly the products turn over. Surplus inventory ties up the chains' money which may not be enough for something important.
For example, sometimes, the chain experiences cash gaps, and the company cannot purchase a certain quantity of fast-moving products on time. What is more, this often happens out of the retailer's sight. It may happen so that the chain pays for delivery, not within the specified period but a little later. One would think, what is the big deal? But if this happens regularly, the agreement with the supplier is violated. Psychologically, an “equitable distribution” situation arises: if the chain fails to fulfill its payment obligations, the supplier may not meet its delivery obligations.
Let's assume, for a second, being the supplier. They have orders for a certain product from several retail chains. Currently, the supplier has this product in limited quantity that should be distributed among several retailers. Who will the supplier prefer? Certainly not the company that delays payments.
When a chain receives an order less than due, lost sales appear, and few people can see the root cause of these consequences.
Conclusion: excess inventory affects the availability of goods due to the limited purchase budget.
A retail product is essentially a shelf. If a product occupies too much storage space, the company loses profit from the products that could be laid out there and sold.
It is important to understand and track the following overstock indicators:
- cost to the company;
- dynamics;
- which SKUs and locations contribute to surplus the most.
Only by having access to complete and relevant information, you can build an inventory management system for working with overstock. LEAFIO Inventory Optimization makes it easy to manage surplus stock by providing all the reports you need.
5 Steps to Avoid Surplus Inventory
Surplus inventory ties up capital and reduces profitability, but by taking proactive steps, retailers can prevent overstocking and keep operations efficient. Here's how to avoid surplus inventory in your retail business:
1. Improve Demand Forecasting and Inventory Planning
Inaccurate demand forecasting can lead to significant inventory challenges, such as overstocking or stock shortages. Overestimating demand results in excess inventory, which increases storage costs and forces markdowns, while underestimating demand causes stockouts, missed sales opportunities, and reduced customer loyalty.
To avoid these issues, retailers need to adopt more precise forecasting methods that not only rely on historical sales data but also consider other important demand-shaping factors and adapt to changing market conditions. Utilizing advanced forecasting tools, retailers can balance inventory levels to meet customer needs without holding unnecessary stock.
LEAFIO's AI-Powered Demand Planning software simplifies this process by automating demand forecasting and refining predictions over time. This ensures that retailers keep their inventory in line with actual sales patterns, reducing the likelihood of surplus and improving operational efficiency.
2. Optimize and automate inventory management
One of the most effective ways to prevent surplus inventory is by leveraging inventory management software that automates critical processes. Without automation, retailers often rely on manual data entry or gut feelings, which can lead to over-ordering. Modern solutions like LEAFIO Inventory Optimization allow retailers to gain full control over product margins by automating routine tasks and continuously optimizing inventory.
The system accurately predicts how much stock is needed to maintain just enough inventory without excess and replenishes stock based on actual sales data rather than estimates, preventing the buildup of too much inventory. When forming orders, LEAFIO AI takes into account various factors such as current stock levels, sales trends, demand fluctuations, safety stock, lead times, and supplier schedules. It even considers external factors like seasonality and market conditions to ensure orders are optimized for the most efficient inventory levels. For businesses dealing with perishables, the system’s fresh algorithm factors in shelf life and residual stock to ensure products are replenished at the right time.
By automating these processes, LEAFIO AI helps retailers increase sales, accelerate turnover, and reduce unnecessary investments, ensuring that inventory levels align with supply and demand efficiently.
With LEAFIO AI, retailers can effectively manage their inventory, avoid surplus, and ensure efficient operations without the need for manual intervention.
3. Monitor Slow-Moving Items and Multi-Location Inventory
Surplus inventory often stems from slow-moving items that don’t sell as quickly as anticipated. Regularly reviewing sales data allows retailers to identify these products early and adjust stock levels accordingly. This is especially important for retailers with multiple locations, where demand may vary significantly by region. Rather than accumulating excess stock, consider redistributing items to stores where they sell better or running promotional campaigns to move inventory. This approach prevents a buildup of low-demand items that can tie up capital and lead to reduced profits.
4. Develop Flexible Supplier Relationships
To avoid surplus inventory, it’s crucial to establish strong and flexible relationships with your suppliers. Having the ability to adjust orders quickly based on changes in demand can help prevent overstocking or shortages. Retailers who rely on rigid supplier contracts may find themselves stuck with more inventory than needed, especially during off-peak periods or unpredictable market shifts.
By negotiating more adaptable terms—such as shorter lead times, flexible minimum order quantities, or the ability to return unsold products—retailers can keep their stock levels more aligned with current sales trends. This allows you to respond quickly to changes in demand without holding excessive stock.
Additionally, building strong supplier partnerships can lead to improved communication and collaboration, enabling better planning around seasonal peaks or promotions. These relationships give you the ability to place smaller, more frequent orders, reducing the risk of overstock while ensuring product availability.
5. Leverage Data and Actionable Insights for Better Decision-Making
Utilizing actionable insights from advanced analytics and inventory management software enables retailers to make more informed decisions about stock levels. By analyzing sales patterns, customer behavior, and external factors, retailers can tailor their orders to match real demand and avoid surplus. Understanding when a surplus occurs and how to adjust ordering practices accordingly helps ensure that you always maintain the right stock levels. Making data-driven decisions is key to keeping your business agile and avoiding the financial impact of over-ordering.
Surplus Inventory Management Strategies
Even with the best planning and forecasting, surplus inventory can still occur. When it does, having a clear strategy for managing excess stock is essential to minimize financial losses and operational disruptions. Below are several common strategies that retailers use to manage surplus inventory, each with its own pros and cons. Choosing the right approach depends on the nature of the products, the cost implications, and the broader business goals:
Returns to the supplier
A growing number of chains are moving away from this practice because it is expensive and unprofitable in terms of operational processes. Although if there is a regulation on the return and it is not too costly, you can use it.
Redistribution of goods within your own supply chain
This is a fairly rational approach, but logistical expenses costs are increasing, decreasing the margin.
Sales and discounts
This is actually true for FRESH category products when the expiration date is coming to an end, and it is wiser to sell them as quickly as possible. Of course, this practice has a negative impact on the final financial results due to the loss of margin.
To do nothing
That would surely be easier. However, this is a road to nowhere, especially in today's competitive environment.
Surplus inventory and its impact on business are often underestimated. Many retailers are more focused on lost sales indicators and reducing payroll fund costs. However, the surplus stock is really important for the business's health since it gradually affects the retailer's internal business processes, ultimately affecting the entire chain's profitability. By shifting this problem to suppliers, you can lose huge amounts of money without even noticing it. Therefore, to begin with, the surplus inventory should be counted, and its impact should be analyzed, and then figure out what to do with it.
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Helen Kom
Inventory Optimization Product Director
