Inventory management is one of the most challenging aspects of running a business. Too little and you lose out on business, too much and you end up with less profit. Regardless of the size of your business and your processes, you may find yourself dealing with excess inventory at one point or the other. What causes excess inventory and what are the consequences?
There are several factors that can contribute to excess inventory or overstocking. Poor inventory management is only a part of it. Here, we will discuss three major causes and three major consequences of excess inventory.
Three Major Causes of Excess Inventory
The primary causes of excess inventory include but are not limited to the following:
Misjudged Customer Demand
Demand is arguably the most important factor to consider when you are stocking your warehouse. When you stock according to demand, it is almost impossible to experience overstocking. However, it is easy to misjudge customer demand and overstock your facility when you are always planning well in advance.
Fear of “Out-Of-Stock
You can lose money and customers when you run out of stock. Many business owners and managers fear the scenario for obvious reasons, most importantly having their customers go to their competitors. Letting fear influence your decision-making process can land you with excess inventory, which is just as big a problem as running out of stock.
Poor Marketing Strategy
It is possible to have the right inventory at one point and see it become excess inventory with time. Poor marketing will leave more products on the shelves, and with time, they will become excess inventory.
Three Major Consequences of Excess Inventory
Excess inventory can affect your business in many ways, but here are some of the most critical consequences:
Increased Carrying Costs
Carrying costs include all costs that are associated with storing inventory, including capital costs, storage space costs, service costs, and inventory risk costs. Some of these costs are not obvious when running a smooth operation. Once you have overstocked items, these costs increase at a remarkably high rate.
Product Degradation and Expiration
When you have too much stock, products on your shelves will begin to deteriorate. If you do not devise measures to get rid of your surplus or old stock, they can expire or perish. Degradation leads to poor quality products, and they command less value. Expired products become liabilities and may cost you a lot of money to get rid of.
Tied-Up Cash and Associated Losses
Too much inventory also means that your cash is tied up on the products on the shelves. There is no way to recover the investment until you sell the overstock. This scenario results in different kinds of economic losses. You can sell your excess inventory on Industrial Clearance for a reduced rate of what it was initially worth. We attract quality buyers who would be more than willing to take your overstock items off your hands.
For more information on how to avoid or manage excess inventory, contact us and we will be happy to help.