Businesses that implement inventory management software, which integrates each node in the supply chain, are generally able to avoid running into an overstock issue. This is because it enables the ability to track, trace and account for inventory in real-time via the cloud. However, for those who remain ingrained in outdated inventory management systems such as spreadsheets, the issue of overstock remains a prevalent issue. The drag on their business can be severe. Overstock erodes a business’ bottom line in a number of ways:
4 Overstocking Disadvantages
1. Occupied storage space
Goods that cannot be sold occupy prime storage real estate. They take the place of inventory that is in demand and can be sold off at a high rate of return thereby driving revenue and business growth. Surplus inventory is literally deadweight holding your business from operating efficiently and it reduces profitably.
2. Cash flow
A key effect of holding on to excess inventory is the fact that it ties up working capital. Unsold and unsalable stock is literally cash in another form. The negative impact of having cash flow tied up in overstocked inventory is more acutely felt in new businesses where every dollar that could be reinvested back into the business to fuel growth. The capital tied up in surplus inventory also adds to the opportunity cost of the business. The capital that could otherwise be channeled towards marketing or capitalising on spontaneous discount offers on in-demand goods is simply unavailable.
3. Inflated operating, labour and storage costs
Considered a covert cost of holding onto too much stock, overstock contributes to raised operating, labour and storage costs. Having to handle, pack, store, insure and monitor that inventory comes at a cost – one that is often not immediately apparent.
4. Raised risk
Goods held in storage for a prolonged period of time are placed at greater risk of loss and damage as a result of theft, tampering, environmental corrosion and of course, obsolescence. If a business has to simply write off inventory, the full value impact of that loss is borne by the bottom line.
5 Ways To Move Excess Inventory
There are two primary objectives in moving excess inventory. Firstly, netting a cash return on the goods and secondly, capitalising on a tax write-off. Both of which are a lot better than the alternative: writing the stock off as a loss.
- Inventory liquidators: The simplest and most direct option is to move the goods in bulk and liquidate them to a specialised inventory liquidator. These are businesses who buy overstock at an attractive discount from businesses looking to rid themselves of their surplus inventory. The main advantage is being able to dump a sizeable quantity of otherwise unsalable stock in one transaction netting an instant cash return on investment.
- Join an online b2b liquidation community: Overstock may be seen as a liability to the business having to deal with it but to many other retailers, re-sellers, wholesalers and distributors it is retail heaven. Online auction sites specialising in liquidation sales are an ideal platform for businesses to find a market willing to take overstock off their hands.
- eBay: Taking into account the scale of the overstock issue, businesses that open a business eBay account often discover an alternative sales channel for their unwanted stock which is failing to sell in its established retail outlets. While eBay typically isn’t suited to moving goods in bulk, the price goods can be sold off is typically higher than through a liquidator.
- Special offers, bundling and gifts: Overstocked inventory is the ideal candidate for helping your business add value and entice sales on in-demand items. This is through offering the item as a free gift with purchase, or as a two for one offer. Bundling is another effective strategy that ensures you are able to sell off stock and at the same time afford the consumer the opportunity to capitalise on ‘value for money’ opportunities.
- Donations for tax deductions: Many new business owners are pleasantly surprised to learn that their deadweight stock can be donated to eligible charities in return for significant tax deductions. This approach effectively helps the business build its brand reputation and there are also direct benefits to the bottom line through tax deductions.
There is no substitute for an optimised supply chain that facilitates maximum efficiency, productivity and profitability for the organisation through the maintenance of accurate inventory levels. This is why all businesses should strive to invest in a customisable inventory management software solution that suits their specific needs.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.