Maybe you’ve been there – or find yourself there right now: overstocked on items and confused. How did you get here? More importantly, how do you get out? We’ve laid the common causes of overstocking, the costs and what you can do to finally get rid of those items that simply don’t want to budge.
As the past year has shown – supply chain shocks and overstocking can happen to the best of us. Understanding why it occurs, the true impact it has and what you can do are important steps in getting a grip around the challenge that almost every industry grapple with.
What is overstocking?
Overstocking or surplus stock occurs when businesses buy more products than they need or can sell.
This over-ordering of inventory leaves retailers with too much stock, left sitting on store shelves or in a warehouse, which can hurt profitability.
6 causes of overstocking
Misjudged consumer demand
Misjudged customer demand is a common cause of surplus stock, costing not only money but valuable shelf space for new products. Understanding consumer behaviour is tricky. But being able to answer the questions: “Who are my customers?” and “are they repeat customers?” are essential when it comes to maintaining your inventory and avoiding surplus stock.
Fear of stockouts
Stock-outs or “out-of-stock” scenarios are a nightmare for a lot of retailers – and good reason, as they cost them $1 trillion annually.
This lost opportunity for revenue also comes with many long term costs including dissatisfied customers, negative impacts on brand reputation and rushed replacement goods.
Ineffective promotional marketing
Marketing is important in enticing consumers to purchase your goods, but it’s wrong to assume that only because you buy a large number of goods from your vendors, consumers will be convinced to buy them due to a cool marketing campaign.
Consumer and sales data should be your north star when you purchase from vendors. Otherwise, you might find yourself easily overstocked.
Insufficient inventory management
Inventory management is a given when it comes to mitigating overstocking. Yet, you’d be surprised to find that many still struggle to get this right.
Inventory costs fall into three common categories: purchasing costs, shortage costs and carrying costs. Carrying costs are the expenses related to holding or storing your inventory, including labour, shipping, opportunity costs, warehousing or storage and depreciation.
Most industries are affected by seasonality, including seasonal goods in retail or harvesting times for agriculture.
Your job is to be aware of which periods may influence your business and how to anticipate these fluctuations. Those who are strategically unprepared will more often than not end up with volumes of overstock.
Dealing with supply chain issues
As 2020 showed, supply chain disruptions can happen whenever and for whatever reason. And they affect every industry sector.
Such inconsistencies can often lead to overbuying, and thereby costly overstock.
The effects of overstocking
There are many effects of overstocking, but much comes down to costs. Overstocking is not only costly at the point of purchase but long after:
Storage space costs dollars (or pounds if you prefer). But it also carries another cost, namely, opportunity cost or the lost opportunity to, for example, do placements of products that could sell.
Tied up costs
There is cash tied up in your products that, until sold, will not have your investment recovered.
This applies to some, but not all goods, but overstocking means running the risk of time-sensitive goods expiring or becoming obsolete.
4 ways to avoid overstocking
Invest in inventory management software
A first step would be to invest in an inventory management system to track, analyse and calculate stock levels. When looking for the right one for you, keep in mind your KPIs and jot down the metrics you’ll be tracking.
A good idea is to develop clear criteria that can help you categorize items. While going through this exercise, think of the different priority levels of your products. For example, ask yourself: is the product critical for operation or to a specific machine function? From here, begin labelling your stock. Make sure to periodically review these classifications as they may change.
Track economic and market trends
Tracking economic and market trends is important to anticipate supply chain fluctuations and reduce risks of surplus stock.
A simple tool to consider is using Google trends to do a quick search on what people are finding of interest over time. From here, you can draft better plans for your business.
Conduct regular audits
Schedule regular inventory audits, keeping in mind your KPIs. Data like cycle time, inventory turnover rate, inventory count and order fulfilment time are all great metrics to track. Don’t forget to consider your inventory costs, including gross margin return, sell-through rate, inventory carrying cost and inventory-to-sales ratio.
Sell your surplus stock online
Once you have identified the current surplus stock you hold, why not turn this stock into cash?
By selling on Machine Compare Marketplace, you can generate generous new revenue streams by turning your unused stock into capital.
Marketplace currently hosts over 260+ brands sold by over 15 multi-national manufacturers listing their surplus inventory on the site.
Getting started on your journey with listing your spare parts on this up-and-coming platform is easy and will take a huge burden off your shoulders.