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What are excess inventory and what are their causes?
Trends

What are excess inventory and what are their causes?

6 min read
Maryna Makarchuk
Maryna MakarchukHead of Implementation
manage excess inventory

Each business is unique, with its own strategies, KPIs, metrics and inventory management approaches. However, the challenges and problems businesses face when dealing with inventory are often the same and can affect any business of any size.

What is excess inventory?

Excess inventory is the number of items per stock-keeping unit (SKU) that exceeds the rationally calculated and cost-effective inventory level.

A rational cost-effective inventory level is calculated using the following metrics:

To calculate the optimal level of inventory for a particular SKU you have to multiply the average replenishment cycle time by average sales, adding a minimum order quantity.

Retailers have to maintain an optimal inventory level for each product. Exceeding this optimal level leads to excess inventory.

What are the causes of excess inventory?

We have analyzed a number of client case studies and came to some conclusions. The main reasons retailers hold too much stock are:

1) Intuitive order forecasting and poor order calculation. Procurement managers often tend to order more inventory than is required or they base their orders on intuition and professional work experience rather than on real business needs and demand levels. The cases we analyzed showed that 80% of intuition-based orders result in overstocking.

2) Ordering in bulk. Suppliers often give discounts for larger orders. Sometimes, unethical suppliers can offer you discounts to get rid of their slow-moving goods. As a result, you end up carrying too much inventory that you cannot sell. If goods are not sold, they become dead stock. Some retailers we worked with complained that 3/4 of goods bought in bulk merely gather dust for more than a year, with only 1/4 of the batch getting sold.

3) Sometimes suppliers pay retailers extra money to secure a place for their products during a promotion season. This measure may seem a win-win situation for both retailer and the supplier, as the retailer gets guaranteed money and stock. However, if the promotion figures are not successful, or if the sales level is lower than expected, the retailer ends up with overstocked shelves and the money received from the supplier is not enough to cover losses.

4) Unfair practices and deals between procurement managers and suppliers. Unfortunately, sometimes managers can create dishonest relationships with suppliers. These orders have nothing to do with real business needs. Suppliers get rid of their dead stock by moving it to retailers’ warehouses.

5) Rarely, national or international suppliers set special order thresholds or minimum order quantities influencing the orders made by retailers.

6) Sudden drop in demand levels. If this happens, you have to quickly recalculate and reconsider your optimal inventory levels. Your current stock level will be higher than the optimal one. The more often you compare, the better.

What happens if you ignore your excess inventory?

Excess inventory is a tricky thing and you won’t find any magic formulae that will help you to alleviate stock issues. Therefore, many retailers pay little or no attention to overstocking and prefer to ignore the problem rather than deal with it. This is what can happen if you do this:

  1. Excess inventory eats up storage space and ties up your capital.
    The whole point of acquiring inventory is reselling it to make a good profit, not letting it sit on the shelf, taking up precious space and resources. Stock turnover is vital for good cash flow and healthy business operations. Think about all the lost profit that excess inventory causes and how much more money you could be making if you could properly manage it. 
  2. Perishable goods can spoil. Other items can become outdated.
    This is especially important for such items as food and medicine, as these products expire very quickly. And if you overstock, you will not only lose the product, but also suffer substantial losses, as having to dispose of expired products also bears a lot of cost and resources.
  3. Storage cost and capacity is another problem of having excess inventory.
    Extra space always means extra expenses. And even if you do have a lot of storage space, surplus inventory still takes up extra resources, such as the staff to manage it, transportation, and utilities required to maintain the storage space. Often, businesses are not able to offer new products that are currently in demand to their customers because their shelves are occupied by surplus stock. And the more you wait to solve this problem, the worse it becomes. 

A step-by-step guide to shedding excess stock

First, analyze your inventory, both in terms of quantity and money. We strongly recommend that you consider both terms and integrate them into your analysis. This will take a bit more time and effort, but is also more comprehensive.

If you compare both quantities and money spent on inventory you will see how much excess stock you have and which extra items are the most expensive. Sometimes retailers get rid of expensive excess inventory and it leads to nothing, the shelves remain stocked.

Accurate and complete analysis allows you to take further effective steps in dealing with excess stock.

Then, divide your excess stock into two groups:

Inventory management solution can help you to group your stock by making a report on sales levels (inventory dynamics) for each product category/subcategory/SKU.

Low-level goods sales need to be closely monitored. You have to understand the causes of extra inventory and mitigate them. Then you can concentrate on selling the existing extra items, balancing the inventory levels, or starting a promotion campaign to sell your overstock faster.

Dead inventory that is not likely to be sold should be taken off the shelves. Do not focus on the causes of deadstock, instead, find proactive and creative ways to manage it.

How should you manage deadstock?

How do you transfer goods between sales locations?

If you have a distribution center (DC), you can move your excess inventory there and redistribute it between other locations, or return it to the supplier.

If you do not have a DC, or transferring goods there may be a costly/logistically ineffective procedure, you can turn the closest or most suitable store into a temporary DC.

overstocked warehouse

You can move goods between stores if they are closely located (in the same city/area/district/province), and if you are sure that your profits margins will not be affected. Sometimes logistics costs and transfer expenses are higher than the profit you may get.

After you eliminate your dead stock you must immediately take it out of the assortment range (or product matrix). If you still do not have an assortment matrix, we strongly recommend that you create one and regularly analyze it. Your assortment range should be up-to-date and filled with top-selling fast-moving and profitable goods.

Optimize and automatize surplus stock management

The best way to solve a problem, sometimes, is to prevent it. Effective excess stock management can be achieved by implementing modern technologies into your business. Using Leafio software, you can gain control of product margins by increasing sales, turnover and decreasing investment, automating routine operational tasks, and continuously controlling and optimizing your inventory, avoiding the problem of surplus stock altogether. Leafio automatically calculates target stock levels and replenishes the inventory whenever necessary, thus optimizing your product range.

Leafio is a next-generation digital supply chain for optimization and automation of surplus stock management. It is capable of making highly accurate demand forecasts and conducting insightful analytics that help optimize business inventory. For businesses that deal with food products, there is a special fresh algorithm that is designed specifically for perishable goods order management. Orders are generated on the basis of demand, residual shelf life, order execution time, and current balances. This will help you to always keep your inventory fresh and avoid stock surplus. 

Thanks to Leafio, you will be able to reduce overstocks significantly, as well as control and optimize your inventory without having to do all the work yourself.

How to sell excess inventory?

If you want to sell it and still make a good profit, there are a few ways of doing it. 

Reselling it to off-price retailers

The easiest way to liquidate excess inventory at a profit is to sell it to an off-price retailer. These are shops that offer discounts and reduced prices, and they purchase overstock products even if there is not much demand for them. Of course, you might lose some profit, but right now, your task is to minimize your losses, since keeping the surplus stock will inevitably end up costing you a lot more.

Offering discounts

If you don’t want to resell it to other retailers, you could try offering discounts on your surplus product at your own store in order to quickly free up the shelves. It’s a great way to get rid of the surplus stock and make a buck. 

Clearance sales 

Clearance sales is another great idea to clear those shelves swiftly. It’s similar to the discount strategy but a lot more full-on. If properly advertised, clearance sales will fill your shop with eager customers at no time. It’s rightfully considered one of the best strategies to liquidate surplus inventory. 

Promote your brand by donating the surplus inventory

Donating to charity is always good for business as it creates great publicity. You can donate a part of your excess stock to various charities that are relevant in your area. This will certainly help boost your image and ensure that more customers learn about your store. Besides, donating has another advantage – tax breaks and deductions. There’s almost no reason not to do it. 

Online marketplaces

Don’t underestimate the power of the internet. Online sales are in nowadays, and selling your surplus items on Amazon or eBay could be a great opportunity for you. It will require some work in order to set everything up, but it will certainly pay off. Make sure to get good pictures of your product, as that is the most important thing when it comes to online shopping. Making your products look good will guarantee your success. 

Surplus as freebies

Who doesn’t like free stuff? Try to cash in on this idea by creating various incentives for your customers that will get them shopping at your store. You could try giving away your surplus stock as a gift if customers spend a certain amount of money in your shop, or offering an exclusive item for online shopping or if customers buy a certain brand of expensive makeup or perfume at your store. There are many ways to benefit from giving away your surplus for free, just use your imagination!

Conclusions

Managing excess inventory is a complex process that requires long-term efforts by your company's management, procurement team and category managers. The risk of having excess stock is high, there are no risk-less periods or secrets. All you have to do to mitigate the risk of having too much stock is to carefully and accurately manage your inventory, deploying systematic, strategic and well-grounded methodologies of stock inventory control.


Maryna Makarchuk
Maryna MakarchukHead of Implementation

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