How to get rid of excess inventory: Tips and considerations
For many businesses, determining how much of their product to stock is one of the first and most difficult challenges to address. Further exacerbating the difficulty of this task is the fact that determining how much product to stock will vary over time, based on many factors, including the success of the business, time of year, and popularity of different products.
Essentially, the issue of how much inventory to stock is a never-ending balancing act for any business. You don’t want to run out of valuable product when it is still in demand, but, on the other hand, the leftover product can represent losses for the company. In addition to careful documentation and management, tools such as a reorder point calculator can help a business manage this delicate balance.
What is excess inventory?
Excess inventory, also known as overstock, is exactly what it sounds like — extra product. Excess stock, or inventory, levels usually refer to inventory that is selling slowly and/or exceeds projected market demand, which results in a poor return on the business’s investment in the product. Many factors can result in excess inventory, including:
- Inaccurate Demand Forecasting: This is a simple matter of incorrectly predicting market demand. The business buys too much product, anticipating more sales than they actually make.
- Late Shipment: Timely shipping is vital in business. Late shipment can result in excess inventory, by causing the receiving business to miss a window of customer demand. For example, if a store orders a shipment of Christmas decorations, but the product is late and only shows up after the holiday, there will likely be excess product.
- Poor Inventory Management: Excess product may arise due to the business’s failure to accurately track inventory. This may result in delayed stocking or unnecessary product orders. Therefore, a good inventory management system is vital for any business that sells physical goods.
Effects of excess inventory
Poor excess inventory management can have many negative effects on a business, ranging from direct impacts on profit to more subtle complications for business operations, including:
- Space Issues: As excess stock remains unsold, it takes up warehouse space that could otherwise be used for more lucrative products.
- Storage Cost: The warehouse space that excess inventory takes up may result in a need for additional storage space. This results in excessive storage costs.
- Reduced Profits: As previously stated, excess inventory has a negative impact on profit. Oftentimes, businesses, especially retailers, do not get a good return on the investment in excess inventory, and may not have physical space to add more lucrative products.
- Waste: Excess inventory may expire, or simply be impossible to sell. This may result in the business having to cut their loss.
- Inflexibility: Ideally, inventory will respond to supply and demand. The time, storage space, and effort involved in dealing with the surplus inventory product can make a business less capable of keeping up with fluctuations in the market.
How to reduce overstock inventory
While avoiding inventory overstock is ideal, it is not always possible. When a business does have to deal with excess inventory, there are several avenues they can take to deal with it, including:
- Discounts: Companies may choose to discount merchandise in order to make some money back on the specific product, while also getting it off of the shelves.
- Bundle: Bundling a surplus product with a related product that is doing well can potentially improve the marketability of both products. For example, if a store is having difficulty selling mattress pads, it may choose to sell those mattress pads for half-off with any purchase of a sheet set. The potential increase in sheet set sales, as a result, can help offset the loss taken from the mattress pads.
- Employee Incentives: Incentivizing employees may encourage them to put particular effort into selling excess inventory. For example, the business may offer to award a gift card to the employee who sells the most excess units in a given month.
- Vendor Negotiation: Vendor negotiation may be a reasonable option under particular circumstances. This option is viable if the company has already agreed to buy a product over a period of time, or if the product has variable popularity. In such cases, the company may choose to negotiate the price of surplus stock in order to lower the long-term losses.
- Liquidation: A closing business involved in the sale of raw or finished goods will likely have excess inventory. As a result, they often have a liquidation sale to make back what money they can.
- Flash Sale: A flash sale encourages a consumer to make a quick decision about whether the product is worth buying at the sale price. This is especially advantageous for excess inventory that must be sold very quickly. Therefore, a flash sale is a popular option for seasonal products.
- Re-market: Sometimes a product will sell better if its presentation is improved. Tactics to make a product more appealing include reorganizing and improving the display, moving the product, or old inventory, to a more highly visible location, or mentioning it directly in advertising.
- Donate: If all other options are exhausted or are more trouble than they are worth, sometimes it is best to just donate the excess inventory and cut your losses.
An occasional excess inventory level is not indicative of poor business practices. Many factors that cause a surplus are out of the company’s control, and almost any company that sells products will find themselves with more than they can sell at some point. Avoiding excess inventory, or surplus stock, as much as possible comes down to choosing good inventory tracking software, but knowing how to minimize financial loss due to excessive stock and maintaining a slow inventory turnover are the marks of a great business.