How to manage and identify excess inventory
It’s not unusual for retailers to worry about not having enough inventory on hand, especially with the disruption caused by COVID-19. But having too much inventory can be just as problematic.
While excess inventory can put you in a strong position to meet unexpected surges in demand, having units pile up in your warehouse can seriously affect your profitability.
But retailers should never view excess inventory as a lost cause. If products aren’t flying off the shelves as quickly as you expected, there are steps you can take to speed up inventory movement and create fresh promotional opportunities for your business.
In this blog, you’re going to learn:
- The definition of excess inventory
- The consequences of excess inventory
- The causes of excess inventory
- The difference between excess inventory and dead stock
- How to handle excess inventory effectively
- The best way to avoid excess inventory
What is excess inventory?
Excess inventory is when the number of units that a retailer carries of a particular product is outstripping customer demand. This results in inventory which is slow-moving and takes up valuable storage space.
Whether excess inventory is a good or a bad thing for a retailer really depends on context. For example, having excess seasonal inventory in advance of the holiday season is a good strategic move, as customer demand during the holidays is much higher than normal.
But if this seasonal inventory is still sitting on shelves when the holiday season is over, you may have a problem.
When excess inventory starts piling up, it results in the following issues:
- Expensive storage/holding costs
- Higher risk of damaged/lost units
- Lower profit margins
- Difficulty tracking inventory in real-time
What are the key causes of excess inventory?
So, why does excess inventory happen in the first place? Usually, it’s due to one or more of the following circumstances:
Just in Case (JIC) inventory management
‘Just in Case’ is exactly what it sounds like; merchants choosing to keep a surplus of inventory on hand to avoid missing out on sales opportunities. In sum, it’s a tradeoff between higher storage costs in return for being able to fulfill more orders.
As a result of the COVID-19 pandemic, many businesses have faced severe supply chain disruption. As a result, we’ve seen a major shift away from a Just in Time (JIT) inventory model, where merchants deliberately maintain a lean supply chain to keep inventory holding costs low, to the more conservative JIC approach.
But because inventory levels are higher, there’s a much bigger risk of excess inventory accumulating - especially for retailers that don’t have multiple selling channels to offload units.
Poor demand forecasting
Demand forecasting is when retailers use a product’s predicted popularity from historical sales data or industry trends to decide how many units to order from the manufacturer or wholesaler.
However, demand forecasting is not an exact science. There are all kinds of variables that can affect consumer demand, such as weather events or even political turbulence, that retailers cannot account for ahead of time. As a result, businesses can end up overestimating the amount of interest in a certain product, leading to excess inventory.
SKU proliferation
SKU counts proliferate when merchants keep adding new product lines or product variations such as size and color to their catalog. However, more SKUs don’t necessarily mean more sales.
SKU proliferation can be positive if a retailer is fostering new demand and gaining an edge over competitors. But if it this controlled or backed by robust data analysis, proliferation makes excess inventory much more likely to occur.
For example, opting to stock a T-shirt in a broad range of colors might increase conversions, but it also splits demand between these different options. If you don’t adjust inventory levels in response, you could easily end up with more stock than you need.
Poor inventory accuracy in-store
Unlike purpose-built fulfillment centers, physical retail stores are not controlled environments. Customers are interacting with inventory all the time during store visits, from putting items back in the wrong places to leaving items in changing rooms.
Furthermore, it’s all too easy for store associates to stick extra SKUs in a dark corner and forget about them - especially if you’re handling inventory manually. The average U.S. retail operation has an inventory accuracy of just 63%. As a result, it’s next to impossible to have full oversight over your inventory levels.
When the time for stocktake rolls around, businesses can end up getting a nasty surprise in the form of excess inventory they didn’t know they had.
Inventory which is highly trend-based
Product categories including fashion, cosmetics, and accessories are highly dynamic due to changing consumer tastes and the demands of the upcoming season. This means that merchants often have an extremely narrow window to sell inventory before it becomes obsolete.
For example, if you’re a fast fashion brand that has a new collection released every few weeks, you need inventory to move extremely quickly to avoid demand being displaced by new stock. If this doesn’t happen, excess inventory can pile up very rapidly.
Metrics for identifying excess inventory
So, how do you know whether excess inventory is a problem at your business?
The sooner you identify excess inventory, the sooner you can take action to prevent it from affecting your profitability. The following inventory KPIs will assist retailers in tracking the movement and performance of their stock:
Inventory Turnover
Inventory Turnover is a measure of how many times inventory is sold out and replaced during a defined time period. If turnover is slow, this is a sign that your inventory is sluggish and that units are outpacing demand.
How to calculate Inventory Turnover:
Inventory Turnover = Sales / Inventory
Days on Hand
Days of Hand refers to the amount of time that inventory is in storage for before it converts into sales. If the number of days on hand is high for a particular product, this indicates slow-moving inventory which is at a high risk of piling up and causing problems.
How to calculate Days on Hand:
Days on Hand = Inventory / Cost of Sales x 365
Average Inventory
Average Inventory calculates the level of inventory you have on-hand during a certain time period. Average inventory allows you to measure fluctuations in inventory levels that could result in excess inventory if sales aren’t keeping pace. If your inventory supply stays steady, excess inventory is less likely to occur.
How to calculate Average Inventory:
Average Inventory = beginning inventory + ending inventory / 2
Inventory to Sales Ratio
Inventory to Sales Ratio is an expression of how much inventory your business is carrying compared to the number of sales. If your ratio is high, this indicates that inventory levels are increasing faster than sales are, leading to an imbalance that results in excess stock and higher storage costs.
How to measure Stock to Sales Ratio
Stock to Sales Ratio = inventory value / sales value
How is excess inventory different from dead stock?
The terms ‘dead stock’ and ‘excess inventory’ are often used interchangeably in discussions about inventory management. However, they represent different ends of the spectrum.
Put simply, dead stock is what happens when a retailer doesn’t deal with excess inventory effectively. It refers to inventory that hasn’t been sold by the end of its lifecycle and has virtually no resale value.
Dead stock is highly problematic for retailers. Obsolete inventory takes up valuable storage space that could be occupied by more popular products. However, many retailers are reluctant to liquidate dead stock because they have so much capital tied up in inventory. As a result, as much as 20-30% of the average retailer’s inventory is made up of dead stock that probably won’t sell.
By contrast, excess inventory isn’t necessarily a lost cause. It all depends on what you do next to prevent it from becoming dead stock.
4 Ways to handle excess inventory
Excess inventory involves its fair share of challenges. But it also creates a lot of opportunities for retailers to improve product offerings and enhance the customer experience, turning excess inventory from a revenue loss into a revenue generator.
1. Create sales promotions around excess inventory
Retailers embrace end-of-season sales for a good reason. When new season inventory is coming in, merchants need to make room for it (either in-store or the front page of their website). By discounting products near the end of their lifecycle, retailers can move inventory quickly and prevent it from becoming dead stock, while also driving greater buyer urgency to purchase.
2. Bundle excess items with popular products
Product bundling is when a retailer pairs a popular item with a product that isn’t performing as well. The bundle is then offered at a discount to entice customers with the prospect of a good deal. Bundling is a highly effective technique to tackle excess inventory because it changes the value proposition of slow-moving items. For example, bundling a last-season computer mouse with a new keyboard is an easy sell because customers need both to use a computer.
3. Use excess product as freebies with customer orders
Few consumers are going to turn down getting something for free. Product sampling is a highly effective technique to introduce customers to new products and create a much more engaging delivery experience. Repurposing excess inventory as a free gift with purchase leaves customers with a positive impression of your brand that helps to drive repeat purchasing behavior. While liquidating excess stock in this way is a lost sales opportunity, using it to foster stronger customer relationships can benefit your business much more in the long run.
4. Donate items to charity
A recent report by Mintel found that 84% of consumers believe it's important for companies to support charitable causes. But it’s not enough just to pay lip service; retailers have to walk to talk if they’re going to convince customers that they genuinely care.
Excess inventory can play an important role in showing tangible support for different causes. If you’re a clothing company, donating excess inventory to a Women’s Refuge charity is a great way to show support and awareness of issues such as ending domestic violence.
5. Avoid excess inventory by partnering with Ryder
You now know some effective ways of dealing with excess inventory, but how can you prevent it from happening in the first place?
Avoiding excess inventory comes down to one key factor: Stellar inventory management.
If you can’t keep track of how much inventory you have, where it is, or whether you can fulfill outstanding orders, it’s much more likely that excess inventory will be a recurring problem. This is because many retailers fall into the trap of ordering more units than they need to create a buffer against poor inventory visibility, resulting in more inventory than they can sell at full price.
By investing in a proper inventory management system, retailers can be confident in their demand forecasting and only order what it is they need, lowering the likelihood of excess inventory piling up.
The Ryder platform offers both established and emerging brands an effective tool for ensuring inventory accuracy and visibility in real-time. Two-way integrations with all major ecommerce platforms including Shopify ensure accurate inventory counts, while the intuitive dashboard makes it easy to filter for specific SKUs. Achieve granular control over your inventory levels - with some of the most advanced fulfillment technology on the market.
Find about more about the Ryder platform here.
