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.
Over-purchasing product
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.
It’s a bad idea to hold too much inventory over a long period, especially when accessible cash flow is already tight.
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 processes 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.
Continuous improvement
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.
You’ll need to have strategies for preventing and managing excess stock if you wish to run an efficient product business.
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
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
