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What is Excess Inventory & How Do You Manage It For Profits?
When ships take on water during a storm, the crew throws heavy, non-essential items overboard. This lightens the boat, so it doesn鈥檛 sink. It鈥檚 a tough call for the captain, but ultimately, survival is a top priority.
Many direct-to-consumer brands find themselves in the same boat. The source of the storm might be pressure from suppliers to order more than enough inventory or fear of an upcoming shortage.
But if there are any market fluctuations, brands need to jettison their excess inventory to save their crews. After all, even retail giants like聽sink a bit when their inventory levels are too high.
Luckily, you keep your聽retail operations smooth sailing by getting ahead of excess inventory.
Excess inventory is the surplus stock retailers have on hand. Unlike聽safety stock, extra inventory isn鈥檛 a strategic buffer against stockouts.
Excess stock happens when the goods ordered don鈥檛 sell as quickly as planned.
More quantifiably, you have too much inventory on hand (AKA, excess inventory) when the product鈥檚 potential value minus storage costs are less than its salvage value. Meaning, you won鈥檛 make a profit, even if that good sells.
Excess inventory is a common issue that every retailer faces at some point.
For instance, adverse weather or natural disasters, long lead times, supplier issues, poor marketing, and聽DTC trends聽ending can all impact how long an item sits on your shelf.
But lately, brands have been intentionally overstocking. Casey Armstrong, Chief Marketing Officer at ShipBob, even notes in聽
鈥�To stave off supply chain problems, indie beauty brands are trying to place bigger purchase orders, but they risk being stuck with inventory they can't use.
This strategy (if we鈥檙e calling it that) puts your business鈥� financial health at risk because when excess inventory officially becomes 鈥渦nsellable,鈥� it turns into聽dead stock听(搁滨笔).
At that point, it doesn鈥檛 matter if the cause of 鈥渄eath鈥� is expiring, rotting, going totally out of style, or otherwise not budging. That obsolescence will be an expensive problem to get rid of.
First, go into your stockroom, warehouse, or garage. Can you walk through the space without a box falling on your head? If not, you have way too much inventory on hand.
We鈥檙e kidding! (Well, mostly.)
There鈥檚 a simple, mathematical way to determine if you have too much inventory on hand. Here鈥檚 what you do:
To calculate your inventory turnover rate, use the following formula:
| inventory turnover rate = costs of goods sold / average inventory value = number of units sold / average number of units on hand |
Here鈥檚 an example: Let鈥檚 say your COGS sit around $40K for the past 12 months. And usual stock on hand during that time costs $10,000.
(In other words, you have $5,000 worth of product inventory at any given time.)
By dividing $40K by $10,000, we get an inventory turnover rate of 4. This means that your inventory sold through ~4 times last year.
Though this rate will differ based on your vertical, customer base, suppliers, marketing team, and so on, an ideal turnover rate typically sits between 2-4.
Less than 2 means you have too much dead stock on hand. And anything more than 4 indicates you鈥檙e at risk of a聽stockout.
Once you know your inventory turnover rate, you can start evaluating the health of your inventory on hand.
Say your inventory turnover rate is high (like 10-15). That puts your turnover rate 聽with high-volume retailers like grocery stores.
So, a high inventory turnover rate won鈥檛 necessarily signal bad news if you sell goods with an expiration date. But it also comes with its challenges.
High-volume retailers typically sell聽seasonal聽or perishable products that need to move their stock quickly 鈥� before they expire or go out of style.
Because of this, these retailers have little safety stock to buffer supply chain disruptions or sudden changes in demand.
But for most ecommerce stores, if you鈥檙e turning over products at a rate of 10 or more, you鈥檙e wildly understocked. So, you鈥檒l likely want to order more inventory to avoid going out of stock and losing sales.
However, if your turnover rate is syrup-slow, like 1-2, you鈥檙e basically keeping products for 6-12 months before they go anywhere. This can happen when you are massively overstocked.
In this case, your next purchase order (PO) likely doesn鈥檛 need to be as big as you think.
This frees up more聽working capital聽to invest in other growth initiatives (like launching a new product) or weather unexpected challenges (like a recession).
Using your inventory turnover rate, you can also calculate your inventory days on hand (the number of days it takes to turn over your inventory).
罢丑颈蝉听inventory management KPI聽can help visualize your ordering efficiency.
To calculate your inventory days on hand, use the following formula
| inventory days on hand = 365 days / turnover rate |
Let鈥檚 go back to our example in Step 1, where our inventory turnover rate was 4. When you divide 365 by 4, you get ~91 days on hand.
Generally speaking, the longer items sit in your warehouse (or the higher their days on hand), the more likely they will become obsolete and lose value.
By routinely recalculating this聽inventory management聽KPI, you prevent overstocking and keep inventory costs low.
While inventory excess is largely considered bad, the good news is it鈥檚 usually caused by 1 of 3 common causes:
Calculated your inventory turnover rate and realized it鈥檚 not what it should be?
You鈥檙e not alone 鈥� the US Census Bureau found that most US retailers hold about $1.26 in inventory for every $1 of sales聽.
This means most brands carry more stock than they need. And a majority of the time, it鈥檚 due to inaccurate demand forecasting.
For example, it鈥檚 easy for human error to mess up a manual demand forecasting process.
Sometimes, retailers manage dozens or even hundreds of spreadsheets simultaneously without connecting those data sources. Meaning, the numbers in 1 sheet may not match another.
Even worse,聽聽don鈥檛 even bother tracking their inventory data or forecasting demand (manually or with聽inventory forecasting software). Naturally, this turns restocking into a gamble.
We won鈥檛 be shy here: We created 吃瓜黑料 to save retailers from being blindsided by the impacts of inaccurate demand forecasting.
You deserve to have inventory control throughout your supply chain to the fulfillment process.
And you also deserve to place purchase orders without crossing your fingers, wondering if you鈥檙e聽ordering optimal quantities. (But more on all that later.)
Most retailers don鈥檛 know something isn鈥檛 working鈥� until it聽really聽isn鈥檛 working.
The average retailer has an inventory accuracy of about 63%. Meaning, they failed to track what happened to a big chunk of the stock correctly.
IHL group even found that retailers have聽聽due to inventory distortion over time 鈥� which they point out is the GDP of the entire country of Australia.
Because of the untidy data issues outlined above and without the right tools to help, conducting inventory audits is so time-consuming that it doesn鈥檛 seem worth it. So, most business owners don鈥檛 run them as often as needed.
In fact,聽聽reports that the main reason operators skip auditing is a lack of effective reporting and inventory management systems:
鈥�Often a company does not recognize that they have excess inventory because the management reporting system (usually a part of the accounting system) does not adequately identify where and how much excess inventory exists.
If you don鈥檛 know your turnover rate, you鈥檒l likely only discover an excess inventory problem聽after聽diving deep into your inventory data.
But by then, your best chances for turning that inventory into revenue may be behind you.
Sometimes, it鈥檚 not you; it鈥檚 them (AKA, anyone along your supply chain).
For instance, vendors can persuade you to over-order.
Longer purchase order lead times can make you second guess when to place orders. But perhaps most notable is supplier聽minimum order quantities.
Minimum order quantities require you to purchase a certain number of units on every purchase order 鈥� even if you don鈥檛 need that much. This protects your supplier鈥檚 bottom line.
(You can always try聽negotiating better contract terms聽to lower your MOQ. However, most suppliers won鈥檛 go for this.)
Suppliers might also offer special wholesale discounts or early seasonal buys that motivate you to hit 鈥渙rder鈥� earlier than needed.
Why? Because scarcity marketing tactics work. Especially the case after the widespread impacts of COVID-19 added more聽supply chain slowdowns.
(Your customers aren鈥檛 the only people making impulse purchases!)
But that鈥檚 where your demand forecasts come in. Those projections (combined with your current inventory levels) should answer: what do you actually need to order and when?
Sticking to that operational plan will keep you from accumulating excess inventory.
Isn鈥檛 having extra product on hand 鈥渏ust in case鈥� a聽good聽thing? For retailers, excess inventory has a few positives. But ultimately, there are more detractors, making it something your business should avoid.
Let鈥檚 walk through a few of each.
A full warehouse can be a huge advantage during times of crisis (like a pandemic). That鈥檚 because it provides you with some extra buffer when supply chains slow.
Your ops team might not love excess inventory, but your marketers sure do! The more inventory you have, the more aggressively they can run campaigns that increase demand.
Plus, during high-demand periods like聽Black Friday, they can do it without worrying about聽seasonal stockouts.
Pandemic disruptions taught consumers to lower their 鈥済otta have it now鈥� overnight shipping expectations. But overall, customers still expect products to be delivered quickly.
With excess inventory, you run a better chance of getting a product into your customers鈥� hands faster, leading to higher customer satisfaction.
If you鈥檙e stocked to maximum capacity, you don鈥檛 have to be as dependent on suppliers鈥� timelines. And this can be a boon, considering how much聽order lead times听蹿濒耻肠迟耻补迟别.
You鈥檒l also have less back-and-forth communication coordinating shipments because you鈥檙e restocking less frequently.
Despite the handiness of the points above, the disadvantages of excess inventory far outweigh the benefits. Here鈥檚 why.
More inventory, more problems. Storing excess inventory incurs tons of extra carrying costs, similar to added interest on maxed-out credit cards.
To protect this product, you鈥檒l pay for ongoing storage, facility upkeep, security, and (possibly) additional staff.
Not to mention the insurance required to protect all of that product just sitting there! And the slower this stock moves, the more expensive it gets.
Then, the unthinkable can happen: You might even max out your storage capacity, leaving no room to store products your customers actually want.
(That is especially risky considering the widespread聽warehouse shortage聽issues lately.)
Plus, the more stock you have sitting in a facility, the more exposed you are to聽inventory risks聽like natural disasters or theft.
There鈥檚 a reason you don鈥檛 keep all your money in gold bars on your closet shelves 鈥� it鈥檚 more vulnerable and exposed that way.
Your business capital 鈥� especially when it鈥檚 tied up in inventory 鈥� is the same way.
This is the big one: Excess inventory locks up cash that could otherwise be used to grow your business.
You need as much capital available as possible at any given time because that鈥檚 actual business security 鈥� not a full warehouse.
That鈥檚 because capital is flexible; excess inventory is not. You can鈥檛 buy advertising space with inventory. Nor can you pay seasonal workers or order new products with inventory!
So, despite popular belief, intentionally holding excess inventory rarely creates more security in your business.
If anything, excess puts your business at higher risk of running out of capital (the聽聽went out of business in 2021, BTW).
Excess inventory might seem beneficial to the聽customer experience聽鈥� I mean, isn鈥檛 being in stock what customers want? Not if you always sell the exact same thing.
When this happens, you鈥檙e more likely to bore your customers, leaving them with little incentive to shop from your brand again.
There鈥檚 a scientific reason for this:聽. Dopamine drives us to seek new experiences (or, when it comes to your brand, new products).
So, the more product variety you can offer, the more dopamine rushes you鈥檒l create for customers and the happier they鈥檒l be.
However, you can鈥檛 offer this variety if excess inventory ties up working capital.
That鈥檚 because, without working capital, you can鈥檛 bring new products to life or run engaging marketing campaigns.
As I mentioned earlier, when excess inventory finally sells, it鈥檚 at a loss (or, at minimum, much lower profit margins).
How so? Because the holding costs 辫濒耻蝉听cost of goods sold (COGS)聽for the stale inventory end up higher than your profit margins. So, your balance sheet isn鈥檛 pretty.
This can be devastating for brands operating on venture capital, especially when your investors like to see upwards-trending charts at quarterly board meetings (what investors don鈥檛?).
In fact, Saravanan Kesavan and Vidya Mani from UNC鈥檚 Kenan Institute of Private Enterprise聽聽that excess inventory leads to poor stock returns. Meaning, your excess inventory could (if bad enough) impact your market value, too.
Luckily, the duo also found that adding abnormal inventory growth into your forecasts can improve the forecasts鈥� accuracy 鈥渁s much as 15.08% for the over-inventoried retailer.鈥�
This makes it easier to shed surplus inventory and recover financially.
Excess inventory will naturally lead to some excess waste. After all, the more stock you have on hand, the harder it is to sell or give it away.
And how you give it away (especially if you鈥檙e just throwing it away) could damage your brand鈥檚 reputation.
After all, people聽聽from companies that clash with their values聽鈥� especially not when it comes to the environment or fair labor practices.
Take Burberry, for example. The luxury fashion brand infamously came under fire when news leaked that they burned聽聽in 2017. But they鈥檙e聽not the only ones聽to do this.
Burberry has since publicly committed to ending this practice.
But fast-fashion retailers (the biggest offenders of excess inventory) are still dumping excess inventory in places like the Chilean Atacama Desert. (At a rate of almost聽.)
Consumer behaviors change rapidly. The pandemic was proof of this, increasing online spending by an unprecedented聽聽bump. And a聽聽is once again catalyzing changes in consumer spending habits.
Excess inventory slows down how fast you can respond to these changes. After all, how can you quickly pivot to meet demand when you鈥檙e stuck selling products no one wants?
So, when fads like Beanie Babies and fidget spinners come and go, they need to come and go from your storage facilities too.
Otherwise, you鈥檒l get stuck holding pass茅 products. And you won鈥檛 have the storage space or capital to provide products your customers actually want.
The best thing you can do is avoid excess inventory in the first place (you can do this with an ops optimization tool like聽吃瓜黑料).
But if you already have excess inventory collecting dust, don鈥檛 panic! Here鈥檚 how you can turn that inventory into profit.
Plan ahead for merchandising do-overs. Retail consultant Chris Guillot聽 to anticipate needing to re-merchandise new products relatively soon after launch (usually around the 2- or 3-week mark).
驰别蝉,听that听蝉辞辞苍!
Remember that 鈥渋nventory turnover days鈥� number you calculated? You don鈥檛 want to discover that it takes several months to turn over your inventory the next time you run an audit.
So, by making remerchandising part of your聽replenishment process, that 2nd wave of marketing needed to expedite turnover won鈥檛 come as a surprise. You鈥檒l have already planned for it.
Running a sale is a classic way to聽increase consumer demand聽and eliminate dead inventory.
Some retailers wisely build post-holiday sales into their marketing calendars to get rid of seasonal leftovers.
(Consider leaning on your historical sales trends to plan promotions following periods of high demand.)
Meanwhile, other retailers will run seemingly spontaneous flash sales.
For the customer, these sales are a fun surprise. But for retailers, it鈥檚 a great tactic to rush excess inventory out the door before it becomes dead stock or accrues expensive holding costs.
For example, kids clothing brand聽聽sold its Mini Rodini product line at a 30% discount heading into the 2022 spring season.
By only discounting 1 product line, the retailer risked turning off parents who aren鈥檛 interested in that label. But they also made the sale more enticing for parents who love the line, making it more likely they鈥檇 sell through the excess inventory.
If you follow this approach, it might make sense to segment your audience for folks previously interested in the discounted line.
You鈥檒l also want to get strategic about when you run sales, so customers don鈥檛 grow accustomed to your slashed prices.
Instead of using discounts as a reactive tactic, use an聽operational planning tool聽to proactively build these promotions into your remerchandising strategy. That way, your team can prepare rather than scramble to keep up.
If a product isn鈥檛 moving, it might be because customers can鈥檛 contextualize what they鈥檇 use it for. Or people might not think the product is 鈥渨orth it鈥� on its own.
By adding that extra inventory on hand to a聽product bundle, you can boost sales. That鈥檚 because bundles help move low-turnover items by pairing them with higher-selling SKUs.
For instance, online home paint retailer聽聽might not make big bucks selling roller extension kits.
But they can suggest the product at checkout when a customer is purchasing paint, along with educational info about why they鈥檇 need that recommended product.
| 馃た Dive deeper:聽Caraway鈥檚 bundling playbook. |
Giveaways are an ace-in-the-hole marketing tactic for moving less-than-fresh inventory.
But it鈥檚 also proven to improve your customers鈥� experience and increase brand loyalty.
狈别补谤濒测听聽who received a free gift from an ecommerce retailer said they were 鈥渟omewhat likely鈥� to buy more frequently.
Plus, partnering with other companies for grouped giveaways can open up new audiences for your brand.
You can give away excess inventory as a thank-you for purchases, too. Freebies at checkout can help you move old products and聽聽of an abandoned cart.
For example, sunscreen brand聽聽gives every customer 2 free samples (of their choice) at checkout to close the conversion.
But to celebrate the 4th of July 2022, customers got a free mini tube of Glowscreen with every purchase (some added sunshine without offering a deep discount).
Sometimes, no matter how brilliant your marketing or bundling tactics are, your customers just lose interest in a product.
When that happens, it might be time to cut your losses. But no need to dump that excess product in a desert (please don鈥檛!).
Instead, give back to your community by donating products to a well-suited charity. You may even find added tax benefits in your donation!
Though generosity is a lovely act, donating goods isn鈥檛 always sustainable or possible from a business viability standpoint.
Even retail businesses that created operational plans centered around presenting inventory, like聽, are beginning to step back from that strategy.
So, avoid factoring these donations into your inventory planning.
Even if you follow all these steps above, it鈥檚 not always guaranteed that you鈥檒l be able to distribute your products to the right organization at the right time. And you may have to throw away that dead stock after all.
So, the best thing you can do to eliminate excess inventory is to create as little of it as possible in the first place!
There are a few ways to avoid excess inventory in the first place, like conducting routine audits, improving demand forecasting, and placing smaller purchase orders for new products.
Plan ahead by scheduling regular inventory audits to check for聽phantom inventory, or excess units that aren鈥檛 reported in your聽inventory levels.
For one, audits are an important habit to build as a business operator.
But even better, cleaning up your data improves your聽inventory accuracy聽and helps your forecasting software work better.
You don鈥檛 have to block off a whole day on your calendar and put everything on hold to audit your inventory. Instead, conduct spot checks of 1-2 SKUs each week until you鈥檝e gone through your entire inventory. Then, rinse and repeat.
If a pattern emerges, like excess stock or shrinkage, conduct a deeper audit focused on that issue to identify what鈥檚 happening.
You need to check historical sales data against current inventory trends to anticipate future customer demand.
Sounds so easy, right? But it鈥檚 not always, especially when you have to spend tons of time analyzing past data to make the most accurate predictions possible.
Sifting through SKUs at this granular level can take hours, if not weeks, to do correctly. And that鈥檚 assuming you make no mistakes and love working all weekend on data dives.
If you have analyzed historical data and real-time聽inventory visibility, your forecast will reflect your current inventory needs. Not what you needed months ago.
奥丑别苍听forecasting demand for new products, you won鈥檛 have historical data to lean on. So accurately placing your first order without creating excess inventory can be tricky.
Treat new products as experiments, even if you鈥檙e confident that your customers want them based on surveys and sales conversations. Meaning, don鈥檛 go all-in. Instead,聽聽to verify that your customers want it.
Then, once you鈥檝e proven there鈥檚 demand for the new item, you can confidently order more without the risk of collecting excess inventory.
Your best bet for reducing excess inventory is removing the possibility of human error in your ordering and planning process through聽inventory optimization.
After all, a slip of a finger on a keyboard can turn a 10 into a 100 and be near-impossible to catch.
An inventory optimization like 吃瓜黑料 prevents these easy (and costly) mistakes by seamlessly integrating with the tools you already use.
That way, you get a single source of truth into your inventory needs and always order the right amount of inventory.
Say goodbye to excess inventory with 吃瓜黑料.
吃瓜黑料 keeps a 24/7 eye on your inventory data and turns it into actionable insights. For instance, use 吃瓜黑料 to:
But no need to take our word for it 鈥� .听
How much inventory you should have depends on your industry, products, customer behavior, suppliers, and lead times. However, retailers generally have enough stock if their inventory turnover ratio is between 2-4.
Excess inventory must be stored until it sells, making it an expensive problem. However, the longer inventory goes unsold, the more likely it will turn into dead stock. When that happens, retailers must devise a strategy to eliminate or throw obsolete inventory away.
It鈥檚 bad to have too much inventory because it invests capital in products that won鈥檛 turn a profit. This tied-up capital makes it difficult, if not impossible, for brands to grow and puts the business at financial risk.
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