Have you ever found yourself sitting on a pile of unsold products or materials, occupying space, hindering profitability and limiting new ventures? If so, you may have a case of excess inventory woes weighing you down. But there are inventory management techniques that can help!

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What This Article Covers:

• What Is Excess Inventory?
• Causes
• Disadvantages
• How To Identify
• How To Reduce
• Next Steps

What Is Excess Inventory?

Excess inventory is a challenge businesses face when they have more products on hand than they can sell in a reasonable amount of time.

This situation can arise due to various factors, such as inaccurate demand projections, canceled orders, or unexpected changes in the market or weather patterns. It can be a costly problem for businesses, tying up valuable resources and leading to potential revenue losses.

Effective excess inventory management is crucial for businesses to navigate this challenge successfully. One key element of effective management is deploying the right technology to provide visibility and control over inventory.

By using a centralized record system, you can access and update inventory information from anywhere, helping you make better decisions about managing excess inventory.

Additionally, by leveraging historical and current data on inventory performance, you can identify patterns and trends in demand, adjust inventory levels accordingly, and make more informed decisions about pricing, promotions and other factors that affect inventory performance.

Causes

Excess inventory is a problem that plagues many businesses, causing them to waste money on storage, increasing the risk of spoilage or obsolescence, and potentially harming their bottom line.

But what are the key causes of this issue, and how can you avoid it?

Just-in-Case Inventory Management

The just-in-case approach involves keeping a surplus of inventory on hand in case of unexpected demand. While it can be tempting to stock up on products to avoid missing out on sales, this strategy can backfire if demand isn’t there.

In addition, the cost of storing excess inventory can be high, especially if you don’t have multiple channels to sell off surplus units.

Poor Demand Forecasting

Retailers rely on demand forecasting to determine how many units to order from manufacturers or wholesalers. However, forecasting isn’t an exact science, and unforeseen events can cause demand to shift dramatically.

When you overestimate demand, you end up with excess inventory you can’t sell.

Unexpected SKU Proliferation

While offering a wide range of product variations can increase customer choice and drive sales, it can also lead to overstocking.

Without proper data analysis to back up SKU decisions, you can end up with too much inventory of certain products or variations, which you can’t sell.

Inconsistent Inventory Tracking

Inaccurate inventory tracking in physical stores is another cause of excess inventory. Customers can easily move items around or leave them in the wrong place, leading to discrepancies in inventory counts. Store associates may also misplace or forget about inventory, leading to excess stock.

Highly Trend-based Inventory

Businesses dealing with fast-changing product categories, such as fashion, cosmetics or accessories, need to move inventory quickly to avoid obsolescence. If they don’t, excess inventory can pile up quickly.

To avoid excess inventory, you must adopt a more proactive approach to inventory management. This includes using data-driven demand forecasting, monitoring inventory accuracy regularly and keeping SKU counts under control. By doing so, you can reduce the risk of overstocking and improve your bottom line.

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Disadvantages

Excess inventory is a bane for any business, and as a business owner, it’s imperative to avoid it. The reasons are plentiful, and the implications are dire.

Let’s take a closer look at why:

• Misused Storage Space: Misused storage space can mean you can’t stock up on in-demand products if your occupying your warehouse with products you can’t move. It’s like having a full refrigerator that doesn’t contain anything you want to eat. This is frustrating, and it wastes resources.
• Increased Storage Costs: This includes rent, utilities and the wages of employees who manage inventory. This drives up conversion costs, which is the total cost of producing and selling a product. If you can’t sell the product, then you incur a loss.
• Lost Revenue: If you’re not selling the product, you’re not making a profit. Furthermore, unsold items interfere with your ability to sell other products, which means you’re missing out on other opportunities to make money. In business, every moment counts, and excess inventory means wasted time and resources.
• Expired Products: Items that sit in storage for too long can depreciate or expire, which can lead to additional costs. Depreciated products are those that decline in value, which means you’re losing profit potential every day they remain unsold. Expired products, on the other hand, are a total write-off, representing a significant financial loss.

To summarize, excess inventory is detrimental to any business, and it’s important to avoid it at all costs. By managing your inventory effectively and efficiently, you can maximize profits, reduce costs and ensure your business succeeds.

Identifying Excess Inventory

Identifying excess inventory is crucial to maintaining profitability and avoiding waste.

Fortunately, several key metrics can help you track your inventory performance and detect excess inventory before it becomes a major issue. And inventory management software can help you track these metrics so you can focus on reduction.

• Inventory Turnover: This metric tells you how often you sell and replace your inventory over time. A low turnover rate is a sign that your inventory isn’t moving as fast as it should, which could lead to a buildup of excess stock that eats into your profits.
• Inventory Days on Hand: This calculates the amount of time that inventory remains in storage before it sells. If the number of days on hand is high for a specific product, it suggests that the inventory is moving too slowly and could result in excess inventory.
• Average Inventory: Calculating average inventory is also helpful for tracking inventory levels over time. This metric takes into account fluctuations in inventory levels and can alert you to potential excess inventory if sales aren’t keeping pace with inventory levels.
• Inventory to Sales Ratio: Finally, the inventory to sales ratio measures the amount of inventory you carry compared to the number of sales. A high ratio indicates that inventory levels are increasing faster than sales, which can lead to excess inventory and increased storage costs.

By regularly monitoring these inventory KPIs, you can stay on top of your inventory performance and quickly identify any issues with excess inventory before they become a major problem.

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How To Reduce Excess Inventory

Excess inventory can be a major headache for any business owner. Not only does it take up valuable space, but it can also tie up your capital, making it difficult to invest in other areas of your business.

Fortunately, there are several ways to reduce excess inventory and turn it into a profit or at least a tax-deductible donation.

• Refunds: One option is to return the excess inventory to your supplier for a refund or credit. This is a great way to recoup some of your costs and free up space in your warehouse. However, expect to take a hit on shipping and handling fees.
• Materials: Another alternative is to divert inventory to new products. You might be able to use the raw materials or components in other lines or at other plants. This requires some rework, but it could also result in new and profitable products.
• Trades: If you can’t use the excess inventory, consider trading with industry partners. Your competitors might need exactly what you have, and you might need what they have. This can be a win-win situation for both parties and help build valuable relationships.
• Discounts: You could offer a special deal on finished goods to distributors or businesses or package your product for a discounted price. Alternatively, you could sell your out-of-date inventory to end-users who don’t care about having the latest make or model.
• Consignment: With consignment, you can maintain ownership while an independent distributor sells your products and takes a cut of the sales. This can be virtual, where you keep the goods and ship them after completion of the sale, or physical, where the distributor stores the goods and handles delivery.
• Liquidation: If all else fails, liquidating the excess inventory might be your only option. You can sell it to a liquidator for a negotiated price or auction it off on eCommerce platforms like eBay. You could also scrap the inventory and sell it for its materials or recycle it to prevent it from going to a landfill.
• Donations: Finally, donating excess inventory to a not-for-profit organization can be tax-deductible. Collaborating with charities and nonprofit organizations can help you reduce inventory and do some good in your community.

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Next Steps

In conclusion, reducing excess inventory can be challenging, but there are many ways to do it. By exploring different options and being creative, you can turn your excess inventory into a profit or a positive contribution to society.

So, why wait? Take the next step towards streamlined inventory management and start searching for software that meets your unique requirements today! You can use our free comparison report to jumpstart your selection.

How do you think implementing excess inventory management processes will be advantageous for your business? Let us know in the comments below!