Many business owners can recognize when it begins: a certain product dwindles in popularity, and the remaining stock begins to take up valuable inventory space. When supply overwhelms demand, excess inventory is the unfortunate result.
Surplus inventory has positive and negative effects on retail businesses, depending on the context. However, all retail owners agree on one thing: it is crucial to offload as many of these items as possible once they begin to pile up.
What is Excess Inventory?
Excess inventory refers to unsold products that occupy inventory space. It could result from stock mismanagement, overbuying, inaccurate demand forecasting, cancellations, unforeseen natural events, and even economic downturns.
Inventory management becomes a challenge—when certain stocks cannot be sold, they occupy shelf space, leading to storage issues. For example, unsold perishable goods will just expire, leading to a lot of avoidable waste. And even if many retail items don’t have expiration dates, keeping them in boxes in the back of a warehouse can still result in damaged merchandise that will become even more difficult to unload.
Retailers do not make any money from excess inventory. In fact, they are sure to incur expenses—they spend more money storing these unsold items than making space for more popular products.
Surplus inventory could signify that a business’s sales and marketing strategies are no longer working. Their stock projections may be inaccurate as well. It is a sure sign that overall operations require a review of where the business needs to improve. Management must also make decisions regarding sales strategies to trigger better inventory turnover.
What are the Main Causes of Surplus Inventory?
There are many reasons for surplus or excess inventory. Retail owners must identify the specific causes so they can direct their teams to focus on these problem areas.
The most common causes of surplus inventory are the following:
1. Not knowing your customers
Sometimes retailers misjudge inventory demand because they have not properly analyzed consumer behavior. And with this customer information deficit, they don’t know who their customers are, what items they prefer, and what keeps them coming back to the store.
Business owners need robust customer data, so their inventory forecasts closely mirror reality.
2. Fear of not having product stock
Retailers fear situations when they run out of stocks of popular products, so they order more inventory than strictly forecasted or even necessary.
Of course, maintaining healthy inventory is vital for any store. Out of stock items mean lost opportunities for profit. And if a store becomes known to run out of items regularly, it will have long-term effects on its reputation and customer perception.
However, retail owners must tread carefully and manage their fear of running out of inventory. The solution is not to overstock every item just so they will never disappoint any customer; instead, they must develop a robust system for forecast demand and inventory management.
3. Lackluster marketing
For products to be sold, they must be marketed and promoted. Retail owners must use the appropriate strategy to advertise what they sell to their target audience. Unfortunately, there is no one-size-fits-all marketing strategy for all products. It is up to retailers and marketers to develop one on their own.
Customer behavior, sales funnels, data analytics, and audience research are crucial elements of an effective marketing strategy. This information will also lead to better purchase decisions when it comes to stocking inventory.
4. Poor inventory management
Poor inventory management and a lack of insight on inventory purchasing, carrying, and shortage costs go together. Expenses can balloon significantly when there is excess inventory; carrying costs cover labor wages, warehouse costs, and losses due to product depreciation.
Business owners must prioritize inventory control and implement a robust inventory management system to prevent these issues.
The seasonality of certain products significantly affects inventory management. Christmas, Thanksgiving, Valentine’s Day, and the changing seasons mean that certain products fly off the shelves only at specific times of the year.
If retail owners are not prepared and do not leverage multiple channels to market and sell products during these periods, they will face tons of excess inventory.
6. Supply chain issues
If retail owners do not receive the expected products due to supply chain issues, they may overcompensate by ordering more items than strictly needed. However, overbuying can create overstock issues.
Over-ordering inventory due to fear or worry about market conditions is not a good strategy to employ. Using data analytics for inventory management ensures healthy stock levels no matter what external issues arise.
7. Challenges specific to the industry
Some issues unique to particular niches can lead to surplus inventory. For example, retailers in the fashion industry are consistently overstocked because they use customer demand to order various styles, sizes, and colors in their attempt to meet everyone’s needs.
Retail companies that sell perishable goods often run into overstock issues because of a lack of data on demand and customer behavior.
Retailers must study their niche thoroughly and keep a close eye on current trends and customer preferences to avoid overstocking.
Why Surplus Inventory is Bad for Business
Excess inventory leads to many disadvantages for retail and ecommerce companies, not least of which is that it costs companies money.
Inventory incurs tons of costs, including procurement, labor wages, warehouse expenses, and product depreciation losses, all of which fall under carrying costs. These include economic costs, too, as overstock leads to lost economic opportunity to invest more capital.
Inventory costs money upon procurement, and purchasing extra stock means that retailers tie up capital on items they cannot sell. This limits the company’s access to liquid capital, and it will take much longer to recover it.
Costs increase exponentially due to surplus inventory, largely due to storage and handling. A full warehouse requires 24/7 staff and expensive equipment to store items safely for long periods.
These costs also increase over time—as items pile up, inventory management becomes more complex and requires more manpower and equipment. Managing product movement becomes more challenging, leading to a continuous cycle.
Costs for storage facilities
Adding products to your inventory creates greater demand for valuable storage space. When you don’t have your own warehouse or don’t have enough space, renting or adding more only means additional expenses.
Some retail owners take other storage expenses for granted, such as electricity, insurance, rental rates, and even wages for additional staff. As long as the products are kept in storage and remain unsold, they will incur expenses.
Surplus and slow-moving inventory depreciate in value over time, since new products continuously emerge in the market. This means retailers will lose money the longer they keep older stock. They will likely need to sell them at a loss to get rid of excess inventory.
Shrinkage occurs when surplus inventory is lost, damaged, or even stolen. And the more a retailer’s inventory expands, shrinkage also increases—companies stand to lose a ton of money.
Ways to Prevent and Reduce Excess Inventory
There are many ways to offload, reduce, and even prevent surplus stock. However, it must be noted recovering the total money spent procuring stock is highly unlikely.
The best most retailers can do is prevent even more losses incurred due to storage and stop the decreasing value of aging older stock.
The methods for disposing of excess inventory are tiered depending on the percentage of the original value the business can still get back. The nature of the items also severely limits a retailer’s options when it comes to the disposal methods that will work for them.
Here are ten ways to dispose of surplus inventory:
1. Get a refund or credit for returns
Retail owners can choose this option if their supplier allows returns in exchange for refunds or discounted items. The company may have to shoulder expenses for shipping returns and the delivery of the new items, but it’s a small price to pay to offload excess stock that is unlikely to be sold.
2. Divert surplus inventory to new products
If a company’s excess inventory or stocks are raw materials or supplies, they can be used for other product lines or variations. The items may need to be reworked, or new products may be created just to use up these excess supplies.
Surplus inventory takes up valuable space that can be used for other items for sale. Diverting supplies to other projects can help manage stock levels and make dead stock profitable again.
3. Trade with partners
Retail owners can work with industry partners and even their competitors—they can share excess inventory or exchange them with other supplies or products that will sell.
This option removes surplus inventory and improves industry relationships.
4. Sell at reduced rates
Retail companies can also create attractive sales opportunities to offload excess inventory to customers or clients. Consider repackaging or selling products at a discounted price or checking with partners who would consider buying out-of-date items at significantly reduced rates.
Inventory turnover rates could increase once sales or discounts are placed on these items.
5. Consider consignment
Retailers can also work with independent distributors or online retailers to sell excess inventory in exchange for a small cut. Working with consignment partners might mean that retailers are still responsible for shipping and delivery.
Sales might not hit the target profit margin or may even be sold at a loss, but at least the products can be moved out of storage.
6. Seek liquidation
If retail owners need to get rid of surplus inventory immediately, a liquidator could be the best way to properly manage it. Liquidators will negotiate for a lower price to remove excess inventory, so companies will have to shoulder the loss.
7. Sell to an auction
Some retailers can sell inventory through auctions. However, this could be a slow process, and it’s likely that not all items will be sold.
8. Scrap it
Retailers with obsolete inventory that contains metals, cloth, or wood can sell some items for scrap. Scrap dealers will take anything of value to them and will happily pay a small fee.
Some retailers pay scrap dealers to get rid of surplus inventory on their behalf, regardless of their value.
If retailers have no other option but to send inventory to a landfill, they should consider recycling the items instead. It is better for the environment and will not lead to unconscionable waste.
Retail companies can also donate excess inventory to charities, non-profit organizations, or any group that will benefit from their products.
Giving these items away as donations could be a possible tax deduction, so it is an excellent option for products that can no longer be sold.
Surplus inventory could indeed become a financial and practical problem. Fortunately, retailers can implement strategies and solutions to prevent too much inventory and resolve inventory management issues. In some ways, retailers can still recoup some of their lost capital.
Businesses can easily avoid surplus inventory when they use robust inventory management software to track inventory supply and demand. The software will oversee inventory levels so companies and marketers can choose which strategies will work to avoid surplus inventory and reach target profit margins.
How do you calculate excess inventory?
There are several ways to track excess inventory.
In the first method, calculate the expected stock and the average number of daily stocks. Calculate the average daily sales by dividing total monthly sales by 365 days minus the days left in the month.
Average Daily Sales = Total of All Monthly Sales/ (365 – Days left in the month)
Once you have your average daily sales, calculate the target stock by multiplying the threshold by your average daily sales.
Target Stock = Threshold x Average Daily Sales
Once you have the Target Stock, you can calculate excess inventory by removing Target Stock from your Stock on Hand (SOH).
Excess Stock = SOH – Target Stock
Another way to calculate excess inventory is to use inventory management software to track all the movement of inventory in storage and track stock levels in real-time.
How to prevent surplus inventory?
Retailers can prevent surplus inventory with the following:
- Observe customer behavior when it comes to products or merchandise to improve the stock ordering process. Understanding their behavior will ensure a more accurate forecast of how many items need to be ordered.
- Use data analytics to forecast consumer demand. Inventory management software can help retailers review the data over a certain period and forecast sales and consumer demand.
- Be strategic when placing orders with suppliers. Consider the timing and delivery schedules to ensure that items do not end up as excess inventory in storage. Consider seasonal trends, the overall product life cycle, and the projected demand over a certain period.
- Check if suppliers can ship directly to clients or customers. They could deliver items more quickly, and retailers will not have to worry about product storage.