Having too much inventory is a common issue that businesses face across many industries, with potential implications for operational efficiency and financial health. Having excess inventory presents numerous problems, from inaccessible capital to sluggish cash flow. Careful planning and good business management tools can help companies reduce the likelihood of ending up with too much inventory and not enough sales.
What is excess inventory?
Excess inventory is a surplus amount of goods or products above what is required to meet the current demand or anticipated sales. Businesses may end up with excess inventory for various reasons, including overestimating customer demand, changes in market conditions, and unexpected competition.
How does surplus inventory differ from excess inventory?
The term surplus inventory is often used interchangeably with excess inventory. Both suggest that a company has too much inventory, though there are some differences between these two concepts.
Surplus inventory identifies overstock that a company has at any given time due to incidental issues and not ongoing problems. A company may have surplus goods temporarily for a number of reasons, including seasonality in sales, preparation for a promotional campaign, or an unexpected change in customer orders. Surplus inventory can typically be sold as part of the normal course of business and doesn’t cause long-term problems for the company.
Excess inventory, by contrast, suggests a long-term problem with inventory turnover, with items that cannot be absorbed within normal business operations and can cause costly problems for a company. Reducing excess inventory requires proactive steps to correct underlying problems.
What causes excess inventory?
There are a number of issues that can cause excess inventory. Here are some of the most common causes:
Inaccurate demand planning
Companies may make errors with inventory forecasting, such as by overestimating customer interest or neglecting to account for market changes. Inaccurate forecasts can cause a company to procure or produce more goods than it can sell in the near term.
Seasonal or cyclical changes
Businesses with seasonal or cyclical sales fluctuations may have more than enough inventory during off-peak periods. If the company fails to reduce procurement or production during those periods, products may accumulate to a problematic degree.
Supply chain problems
Issues with supply chain strategy may prompt businesses to build up inventory to prevent stockouts. Supply chain delays in receiving a component or part may result in excess inventory of unfinished goods.
Shift in consumer trends
When customer preferences change quickly, retailers can end up with less demand for their stock than expected as customers demand new products, leading to excess inventory.
Poor planning
Companies may accidentally produce or procure more goods needed due to strategic misalignments or poor decision-making. For example, buyers may purchase in bulk for a discount without first verifying sufficient demand.
Dips in consumer demand
Economic uncertainty and market downturns can stifle consumer demand unexpectedly, leaving inventory unsold. Companies that fail to react quickly can easily over-procure and end up with excess inventory.
What problems arise from excess inventory?
Excess inventory levels can have major implications for a company’s finances and operational efficiency. Here are some of the problems that arise from too-high inventory:
Lack of access to capital
The capital that is tied up in excess stock cannot be used elsewhere in the business, such as to advance strategic initiatives or improve cash flow. Having too much capital locked into excess inventory can limit a business’s ability to grow.
Carrying costs
Inventory costs a lot to maintain, as these goods must be given storage space, insured, and handled. They also face depreciation. All of these maintenance and storage costs, or carrying costs, can reduce the goods’ potential profitability.
Expired and obsolete inventory
Dead stock that doesn’t move off the shelves will increasingly become obsolete or expire. Companies with obsolete inventory or soon-to-spoil products may need to write off or mark down the products, reducing profit.
Supply chain disruptions
A successful supply chain must be lean and efficient, so companies that hold on to excess inventory may find their supply chains bogging down. It takes extra space, staff, and operational effort to manage excess inventory, leading to inefficiencies.
Sluggish cash flow
Excess stock has little inventory turnover, sitting on the shelf tying up capital, which means this excess drags down company cash flow and affects the bottom line.
Reduced profit
Business owners often use discounted prices, promotions, and sales to clear excess inventory, which reduces the revenue they get from those goods. This shortfall decreases profit margins.
Reduced customer satisfaction
Businesses that maintain excess inventory may not have the funds or space to obtain inventory of the newest, most in-demand products. Customers’ experience with and loyalty to that business can be harmed if they cannot get the products they are looking for from the company.
7 Ways to get rid of excess inventory
Businesses can take a number of measures to clear excess inventory from their shelves. Here are some ways of getting rid of excess inventory:
1. Sales and discounts: A first-line option for moving excess goods is offering discounts, sales, or promotions to spur demand. A lower price may attract price-sensitive buyers that are new to the business, especially in ecommerce.
2. Bundling products: Companies may be able to move excess inventory by bundling or packaging them with higher-demand products. An example might be a “picnic bundle” that combines excess picnic blankets with in-demand picnic baskets for a package price.
3. Returns: Businesses may be able to return their excess inventory to their suppliers in accordance with the terms and agreements in their agreements. Using this method can recoup some or all of the products’ costs while reducing stock levels.
4. Clearance sales: Excess inventory that is unlikely to sell at regular sale prices or qualify for a return, such as outdated or discontinued items, may find buyers at a steep discount. Businesses can mount liquidation or clearance sales to salvage revenue from excess stock.
5. Donations: Businesses can give excess inventory to nonprofit organizations. By doing so, companies can clear storage space while contributing to a good cause, generating positive reputational goodwill, and securing a tax write-off.
6. Recycling or upcycling: Repurposing, recycling, or upcycling may be options for items that can’t be sold or donated, or whose component parts have high value.
7. Supplier negotiations: Businesses can look ahead to problems with their inventory orders and can communicate with suppliers. With enough lead time, companies can negotiate adjustments to orders or other alternatives to prevent potential problems with inventory.
How QuickBooks Enterprise helps businesses anticipate excess inventory
Addressing excess inventory requires improving inventory life cycle efficiency, including the accuracy of demand forecasting, streamlining inventory management methods, and communicating effectively with suppliers and customers. Companies should regularly review their inventory and proactively work to optimize inventory levels.
QuickBooks Enterprise helps growing businesses do this with automated inventory management, ensuring efficient inventory control and order management. Users can see their inventory levels in real-time, track orders, and assess inventory needs accurately. Automations help ensure faster and more accurate order fulfillment.
Get a handle on excess inventory
Companies striving to deal with problems of excess inventory should assess the specific nature of the problem, the market conditions in play, and their overall business strategy. In most cases, the issue can be improved with accurate planning, creative problem-solving, and proactive inventory management practices.
