Can a business hold too much inventory?
Yes. And when it happens, a company’s ability to be agile and cost-efficient plummets. But the complexities of running a business mean ending up with too much inventory is a near-certainty at some time.
To reduce your risk of having all your capital tied up in unmoving stock, this article explores why too much inventory is bad, the causes of excess stock, and what you can do to prevent it.
What does too much inventory mean?
Too much inventory refers to an excess of goods or products held in storage by a company.
Due to poor stock control, a lack of planning, or unpredictable shifts in customer demand, a business can end up holding more stock than is cost-effective or able to be sold. This prevents a business from running at its most efficient potential.
Too much inventory can be assessed by analysing:
- the profit margins of each product you sell
- the length of time it will take to shift those products
- the value of each unit being stored
When there is a mismatch between cost and value or profit received, the result is too much inventory in storage. But monitoring the cash conversion cycle metric can help businesses save themselves from this fate before it’s too late.
Why is it bad to have too much inventory?
Too much inventory is bad for any business holding physical goods. It restricts your freedom to work efficiently and can prevent you from paying bills and staff on time. Excess inventory also consumes storage space better utilised by saleable stock.
Let’s look at five key disadvantages of holding too much inventory:
1. It’s a waste of money and resources
Storing goods requires labour, security, and administrative support – all of which consume valuable time and money. It also costs in terms of overheads such as electricity and floor space. An excess of products in storage can also mean higher insurance costs.
2. It restricts your cash flow
Storing inventory is expensive. And when products are left to gather dust on shelves, their potential value is taken out of the business. This limits your cash flow until it is sold, which puts your business at risk of being unable to make crucial payments on time.
3. Risk of stock obsolescence and spoilage
Having too much inventory means you risk the goods spoiling or becoming dated. This is of particular concern if your business is in the FMCG sector or others in which trends or consumer demand changes rapidly. Overstocking inventory which is only in demand for a limited time can cause significant losses for the business.
4. Missed opportunities
Whenever a bad decision around the stock is made, an opportunity is lost elsewhere. Too much of one product in the warehouse takes up space that would otherwise be used for a more popular product. Stock sitting idle costs money and chews up cash which could, for example, be spent on marketing campaigns.
5. Decreased business agility
Too much inventory limits your ability to respond with as much agility as if you were stocked at the optimal levels. It can also slow down warehousing processes like order picking because shelf utilisation is no longer optimised.
What happens to excess inventory?
The strategies that can be implemented to reduce excess inventory include:
- Offer customers a deal. Discounts and promotions, such as a “buy one get one free” offer, are popular methods for clearing excess stock. While this isn’t usually a profit-friendly approach, at least you’ll shift the units and make room for other products.
- Send it back to the supplier. If products or goods are in the same state as when you received them, you might be able to send them back. Keep in mind you’ll likely have to cover return shipping costs and other charges.
- Repurpose the products. In some cases, it’s possible to repurpose unsold goods. For example, they can be bundled with fast-moving products or disassembled for spare parts.
- Donate it. Donating excess inventory to a worthwhile cause can have flow-on benefits for the company. Apart from shifting the stock, it also positions the business as one which supports the community and can open valuable networking opportunities.
Common causes of too much inventory
Many paths can lead to too much inventory. Let’s look at some of the more common causes.
Inaccurate demand forecasting
Demand forecasting is a complex art.
Many factors can impact your forecasting accuracy, including:
- Fluctuating demand
- Celebrity influence
- Inadequate data
- Flawed research
- Outdated information
When this happens, a business can be left with surplus inventory and limited ways to shift it on.
Sudden shifts in customer demand
Customer demand can be influenced by unpredictable factors, such as a celebrity endorsing a certain product or giving another a bad name. External factors cannot be forecast and can therefore have a punishing impact on inventory management.
Beyond these unexpected shifts are the slower changes in market trends that may catch you unawares, leading to excess inventory in your warehouses.
As a business owner, you’re constantly making decisions about the purchasing of certain products. Bulk buying or discount offers are frequently in play, and often appealing. However, buying large quantities of products at discounted prices can mean you’re left with too many units.
Ineffective inventory practices
Poor inventory planning and warehouse management processes often lead to too much inventory on hand. Incorrect racking of products and ineffective order management can result in an oversupply of goods being held in the warehouse.
Delays in production or distribution
Glitches at either end of the production chain – either with the supply of goods or the delivery to customers – can create an oversupply of goods in the warehouse.
Sometimes production disruptions can happen unexpectedly, such as the impact of a major weather event. Sometimes they can be put down to human failings.
Either way, delays in products landing in the warehouse or behind shipped out to customers can create bottlenecks that result in too much inventory.
Flawed sales and marketing strategies
If communication between departments is not up to scratch, it’s easy for the folks in the office to forget to ask the folks in the warehouse before implementing a new growth strategy.
A bad sales and marketing strategy can leave inventory behind in the warehouse simply by failing to account for inventory reduction in the plan.
Excess inventory examples
To paint a clearer picture of why too much inventory is bad for business, let’s consider a recent example of excess inventory from footwear retailer, Adidas.
After distasteful comments from Kanye West, an Adidas brand affiliate, turned many fans against the rapper (and, by association, Adidas), the shoe brand was left with more than USD 1 billion worth of Yeezy shoes.
By way of response, Adidas repaired some of the damage to their brand by donating the proceeds from clearing excess Yeezy stock to social justice organisations.
Hypothetical examples of times a business might end up with too much inventory:
- In the electronics sector: One brand might release a new smartphone, only to be scuppered by a competitor release soon afterwards.
- In the food industry: Purchasing significant numbers of avocados that are nearly ripe might mean there is only a short window in which they can be sold.
- In the pharmaceutical industry: Demand can shift through a change in regulations or funding. A business may produce large quantities of a certain drug in expectation of high demand, only to be undercut by a shift in regulation.
Strategies to prevent the risk of carrying too much inventory
Check out the examples below for ways you can mitigate the risk of excess stock. You may need to test these against your existing business workflows and strategies.
Root cause analysis
Understanding a problem is always the first step to resolving it.
If you’ve ended up with excess inventory, look at your procurement and inventory management strategies, along with any processes you use for determining stock levels.
Try to identify where you went wrong and what can be done to prevent it from happening again.
Improve your forecasting
Demand forecasting should be treated as an ongoing task that needs close monitoring.
If your forecast is inaccurate or something happens to make it inaccurate, it can be easy to wind up with too much stock of a particular product.
Consider the data that informs your forecasts: Has it come from a reliable source? Are you using the right demand forecasting software? Have external events impacted the demand for your products?
Focus on departmental collaboration
Excess inventory may be a result of a failure of communication between teams or departments.
For example, the marketing team may be aware of a shift in demand for a certain product, but not have communicated that to the team managing suppliers. This could lead to a disconnect between what is ordered and what is in demand.
Review your inventory management strategy
Do you have the right workflow for your inventory needs?
Adopting a Just-In-Time inventory management strategy may improve the flow of products through your warehouse. Auditing your warehouse management can reveal issues which can be tidied up.
Different inventory management strategies work well for different companies. You may need to try a few on for size before finding the right fit. In some cases, a hybrid approach could help reduce the risk of too much inventory.
Fine-tune your supplier relationships
Negotiate terms with your suppliers that allow you to return products or exchange them for other goods when they don’t sell. If your existing suppliers are unwilling to discuss such terms, consider if they are the right fit for your business.
In a rapidly changing environment, one of the best ways to safeguard against financial challenges like too much inventory is to adopt a culture of continuous improvement.
This could mean adopting agile ways of working, improving the use of your data, and implementing a culture that supports business pivots when necessary.
How to manage excess inventory
If you’re here because it’s too late – for one reason or another, you’ve ended up with too much inventory – the tips below can help you deal with your excess stock more efficiently.
Out of sight – but not out of mind
Move excess stock to the farthest available area from your packing station. This ensures that faster-moving goods are easier to get to and that excess stock is not blocking any important picking paths.
Make sure to make a note of where you relocate your old stock, as you’ll still need to get rid of it eventually.
Product bundling is a great way to clear excess stock and free up storage space in the warehouse.
Combine your unmoving inventory with popular items to make them more desirable and likelier to sell. For example, a phone accessories business might lump in last year’s cases with this year’s chargers to create a more attractive offer.
Upgrade to cloud-based business management
By switching from paper or spreadsheet systems to cloud-based software, you can create a digital cloud – an online hub of integrated business data – that updates stock movements in real time across the business.
This means that if, for example, you make a sale through your Shopify store, then the stock levels in your Amazon account reflect the change.
This helps to improve the accuracy of demand forecasting and stock control which directly impact how much excess stock you’re likely to carry and the inventory risks that come with it