From Storage Woes to Solutions: Handling Surplus Inventory
By GOIS July 26, 2023
Read Time:3minsCan a company have too much inventory on hand?
Yes. And when it does, a company’s capacity for cost- and time-effectiveness declines. But because running a business is so complicated, it’s almost certain that you’ll have too much inventory at some point.
This article examines why having too much inventory is bad, the reasons of excess stock, and what you can do to prevent it in order to lower your risk of having all of your capital locked up in unsold inventory.
How much inventory is too much?
An excess of items or products that a business keeps in storage is referred to as having too much inventory. A company may find itself storing more inventory than is practical or able to be sold as a result of inadequate stock control, a lack of planning, or unpredictably shifting client demand. As a result, a company cannot operate as effectively as it could.
To determine whether there is too much inventory, analyze:
The profit margins on each item you sell
The time it will take to move those items
The cost of each unit that is being stored
Why is having too much inventory bad?
Any business that sells tangible things suffers from having too much inventory. It limits your ability to operate effectively and may make it difficult for you to make on-time payments to personnel and bills. Additionally, excess inventory takes up storage space that would be better used by saleable products.
Here are the top five drawbacks of having too much inventory:
1. It is a waste of resources and money:
Keeping products in storage necessitates labor, security, and administrative assistance—all of which cost time and money. Additionally, overhead expenses like energy and floor space add to the cost. Increased insurance expenses may also result from having too many things in storage. 2. It limits your access to cash
Inventory storage is expensive. Additionally, the potential value of products is lost to the industry when they are left to collect dust on shelves. This restricts your cash flow until it is sold, which increases the likelihood that your company won’t be able to make important payments on time. 3. The chance of spoiled and outdated stock
A surplus of inventory puts the products at risk of rotting or aging. This is especially important if your company operates in an industry like FMCG where trends or consumer demand change quickly. Overstocking merchandise that is only temporarily in demand might result in severe losses for the company. 4. Opportunities lost
Every time a poor choice is made about the stock, an opportunity is wasted somewhere else. When a warehouse has an excessive amount of one product, space that could be used for another, more well-liked product is taken up. Stock that is sitting idle costs money and eats up funds that could, for instance, be used for marketing initiatives. 5. Lessened organizational agility
You can’t react with the same agility if you have too much stuff compared to when you have the right amount. Due to the decreased shelf utilization, warehouse procedures like order picking may also take longer.
What happens to surplus stock?
The following are some methods that can be used to cut back on surplus inventory:
1. Give customers a discount: In order to get rid of extra stock, discounts and promotions like a “buy one, get one free” deal are frequently used. Even though this strategy typically doesn’t result in a profit, at least you’ll move the units and make place for new things. 2. Return it to the vendor: You might be able to return items if they’re in the same condition as when you received them. Remember that you’ll probably have to pay for return shipping as well as other fees. 3. Use the things in new ways: Unsold items may occasionally be put to another use. For instance, they can be broken down for spare parts or packaged with quickly moving products. 4.Donate it: Donating extra inventory to a good cause can benefit the business as a whole. In addition to moving the inventory, it presents the company as one that helps the neighborhood and may create beneficial networking opportunities. Common reasons for having too much inventory
There are many ways to accumulate too much stock. Let’s examine a few of the more prevalent causes. Forecasting demand incorrectly
Demand predicting is a difficult skill.
Your predicting accuracy may be impacted by a variety of things, such as:
In conclusion, having too much inventory can be detrimental to a company’s efficiency, financial health, and overall operations. It leads to wasted resources, ties up capital, and limits the ability to respond quickly to market changes. Excess inventory can result in financial strain, as cash flow is tied up in unsold goods, and it increases the risk of products becoming spoiled or outdated.
To avoid the pitfalls of excess inventory, businesses must carefully analyze demand, improve forecasting accuracy, and implement effective stock control strategies. By doing so, companies can prevent overstocking, reduce costs, and optimize their use of storage space.
In the dynamic and competitive business environment, maintaining the right balance of inventory is crucial for success. By addressing the issues of excess inventory and adopting proactive inventory management practices, businesses can enhance their organizational agility, optimize cash flow, and seize valuable opportunities for growth.
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