One of the most important aspects of item-based businesses is their inventory. Since inventory is essentially their main source of revenue, these companies must make sure they have efficient processes in place to keep track of how much inventory they have, how much they have to store, and how much needs to be restocked.
However, this can be a challenge for some organizations, causing many to keep excess inventory. Whether it be accidental or intentional, disorganized inventory processes, weak supply chains, and human error typically lead to excess inventory.
While this might seem like a harmless safety stock tactic, having too much inventory can restrict a company’s cash flow, waste valuable costs, and have a major negative impact on the entire operation.
Fortunately, adopting inventory management software helps companies avoid excess inventory and accurately keep track of inventory levels, orders, sales, and deliveries.
What Is Excess Inventory?
Inevitably, a product might not sell as quickly as anticipated. Some items stay on shelves for far too long, generally due to a lack of interest on the consumers’ part. These products eventually become obsolete stock that no longer carries any marketable value. And since the business must generate revenue somehow, companies are forced to remove obsolete stock off the shelves.
This, in essence, is an informal definition of excess inventory.
By formal definition, excess inventory is when a product exceeds the projected consumer demand, leaving many remaining items unsold. This can often lead to high operational costs and financial implications, putting businesses at risk of outstanding debts and eventually, bankruptcy.
Perhaps the most recent and widespread example of excess inventory was seen during the beginning of COVID-19, in which many stores were forced to temporarily close, factories were forced to shut down, and companies and consumers both experienced extended delays in shipping.
This caused excess inventory problems for many companies; and since they couldn’t generate enough revenue to sustain themselves, these brands were forced to close their doors permanently. While, on occasion, excess inventory can be used as a buffer against stock-outs, many companies do everything they can to avoid excess inventory in their warehouses.
How Does Excess Inventory Happen?
There can be serval causes for excess inventory, but the leading cause is poor demand forecasting. In our current highly-competitive economy, inaccurate demand forecasting is practically a guarantee of eventual failure for a company. And while many businesses go the extra mile to ensure they obtain accurate demand forecasting, this issue still plagues organizations.
Inaccurate calculations can often lead to carrying too little or—in the case of excess inventory— too much stock. When conducting these calculations, companies must take into account all current and potential factors that could affect the demand. An internal factor would be considered those that directly influence consumers’ interest in the product, such as changing seasonal trends.
External factors are more difficult to predict since they affect consumers’ interest in the product indirectly. Getting back to the pandemic, this would be a prime example of an unpredicted external factor.
Another common cause of excess inventory is poor inventory management processes. Any successful company must have a process in place to effectively manage its inventory. Inventory management means being responsible for various sales-related tasks, such as making transactions, ordering, and purchasing.
However, when there is a lack of coordination and organization within the inventory management team, excess inventory is likely to happen. Weak supply chains are also another reason excess inventory happens—and it’s an issue our economy has recently come to know all too well.
Back in 2020 and 2021, hundreds of businesses were forced to reevaluate their supply chain management systems amidst a time of crisis. From disorganized processes to low resilience to supplier constraints, companies were faced with dozens of flaws hidden in their supply chain.
And while many organizations were forced to find solutions to issues quickly, those hidden flaws had already put many businesses in positions of excess inventory—a problem that’s hard to reverse.
The Risks of Excess Inventory
Excess inventory is an issue found across all industries, and while for some, it might be considered an advantage, the level of risks is far more considerable. In the 1990s, excess inventory was a significant factor in putting some of the largest companies in the country out of business. Today, the world has larger awareness of the issue of excess inventory, but not everyone realizes just how much risk it poses.
Firstly, excess inventory can have a huge negative impact on a business’s profitability. Since the purpose of the inventory is to be purchased and resold to turn a profit, having an excess can result in deprecation of goods and loss of revenue.
Additionally, excess inventory has a physical impact—and not a good one. With increasing global awareness of sustainability, retailers are looking for more ethical standards in product development, purchasing, packaging, and shipping. However, having an overstock of goods leads to significant environmental waste, which will only drive away customers and investors.
In the food industry, overstock of perishable food has contributed to both financial and environmental waste. According to Stop Food Waste Today, over 30% of all food produced and 45% of root crops, fruit, and vegetables are wasted each year. Financially speaking, the United States spends more than $160 billion on wasted food, with the average American family of four wasting $1,500 worth of food annually.
Likewise, this plague of excess inventory is spotted throughout the beauty and fashion industries, both of which and trending in growing levels of unsold inventory and wasted products.
Unfortunately, this is only the tip of the iceberg when it comes to the risks of excess inventory. Financial and material waste is the leading disadvantages, but companies should also be aware of storage problems, a decrease in company flexibility, tie-ups in necessary working capital, increase carrying costs, and other risks that threaten the survival of any business.
Inventory Management Software: How Does It Work?
There are measures that companies can take not to reduce the chances of excess inventory—and it starts with establishing inventory management software. Inventory management software is an automation tool that preprograms aspects of inventory tracking and warehouse management.
Instead of managing all tasks by hand, management software streamlines tasks and gives greater visibility into what’s happening with your stock—including chances of excess inventory.
Since most inventory management systems are cloud-based, companies are not required to maintain servers or an IT staff, making it a more cost-effective solution for tracking inventory, updating accounting data, and managing to reorder. This allows the company to receive real-time updates and make better, more accurate management decisions.
Some larger businesses choose to add barcode scanners or tracking devices to their inventory management software, which makes the process of tracking large amounts of stock easier.
Benefits of Using Inventory Management Software
Using an inventory management system offers several benefits for a company, but the exact benefits will depend on the size and type of company you run. For example, larger companies operating in the food industry likely have a more significant amount of perishable items which could have financial and environmental impacts. Fortunately, using inventory management software reduce costs and lowers the potential of wasted goods.
When it comes to excess inventory, inventory management software can help businesses reduce costs from excess stock by offering a more accurate prediction of how much of each product you need. Manual operations are known to slow down and cause hiccups in inventory management, but using automation software can avoid human error and provide precise demand forecasting so you don’t have to worry about carrying too much stock.
Plus, using inventory management software allows teams to plan. Streamlining the inventory management process is about obtaining end-to-end visibility in the supply chain system. Using your management software to run real-time analysis on your inventory can help your company make better future decisions.
And speaking of planning, you can reduce storage costs but obtain accurate inventory data and predictions. Excess inventory increase warehousing and staffing costs. But by using inventory management software, businesses can maintain an optimal amount of inventory without wasting warehousing space.
This reduction in costs means this money can be used for other important aspects of the business, whether it be hiring new employees or enhancing product development.
Enhance Inventory Management Processes With BirchStreet
Excess inventory is a problem that many companies face, but there are solutions you can use to avoid such an issue. Effectively managing excess inventory relies on having responsive and reliable inventory management software in place. Adopting this software can help you receive real-time demand forecasting and inventory predictions, as well as lower costs and negative environmental impacts.
BirchStreet’s inventory management with AccuBar’s software offers accurate inventory counts at any storeroom location, so you can keep track of perpetual inventory. Using high-tech data and analysis, companies can reach greater efficiency, streamlined workflows, and profitability in the long run.