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Ciaran Lumsden
Business Development
You know you’ve got excess stock issues, and so does everyone else in the business. I mean, it’s probably why you’re reading this article right now.
It’s a little like a broken leg. You look down and… something’s not right.
Not only are things out of place. There’s mass where there shouldn’t be. And it hurts.
Both your leg and your warehouse are fundamental to you running every day.
But there’s good news. Because, the first stage, like many things in life, is admitting something’s awry.
If you ignore the pulsating throbbing coming from your leg, you’ll make it worse. And by the time you reach the doctor, the extent of the damage will have exacerbated.
And it’s the same with your excess stock problem.
Ignore it at your peril.
Excess stock hurts every corner of your business. Every department and every employee. But there are some excesses which can be filed under ‘mild annoyance’. A short-term issue and easily solved.
There are others however, which could cost you a lot. Both in immediate performance and future growth.
And each problem offers up a minimum of three ways it can hurt you.
Think of each one as a prize fighter with three special moves. Three different punches to leave you on the canvas.
Buying the stock in the first place is the most obvious punch in the gut. If you include your logistics & transportation costs it’s a hefty outlay.
The jab to the jaw of holding costs. Think about storage & maintaining your inventory. An inventory, in this case, you don’t need.
The final body blow is opportunity cost. Your money’s left unavoidably redundant. Even if you’re a heavyweight, once your resources are spent it can render your defences useless.
This article will teach you how to get up off the canvas and come out swinging.
It’ll give you tricks of the trade utilised by thousands of successful companies all over the world.
It’ll help you fine tune your inventory strategy. Take control of your assortment. And tackle supplier issues head on.
But before we go on, know this isn’t an easy thing to do. To win this fight you have to have the stomach for it. You have to train and be ready to take some hits along the way. And as most experts will tell you, there’s only so much you can take from others.
At some point it becomes about you.
That point is now.
So tuck your jaw in, and let’s talk strategy.
It’s perhaps not conducive to office harmony to start pointing the finger. After all, when things go wrong, your time’s better spent working out solutions in place of apportioning blame.
That said, if you better understand why you’re in this mess, the solutions might come quicker.
And excess stock’s a big mess.
So is it the supply chain team? Perhaps that makes the most sense? They’re in charge of purchasing.
Maybe Finance could’ve stepped in? Or the Planning team? Or the CEO? Isn’t this the C-suite’s job?
Well, sadly if you’re in management, there’s bad news. Because this almost certainly falls on your shoulders.
Management determined whether the product was stocked or not, the sourcing strategy and target service levels. And these three elements are critical factors.
But let’s move on from the blame game and offer a remedy to stop this happening again.
As it’s where a huge amount of your capital’s invested, it’s probably fair to say inventory value was where your excess stock problem first reared its head.
A sharp rise in value should ring alarm bells.
But many struggle to see past inventory value. And without segmenting the value held in individual stock, it’s impossible to see problem from opportunity.
And this leaves a bigger problem, in that most have no idea how much excess stock they actually have.
Is the stock you hold a short-term problem, which will be solved by fast moving products? Or is it tied up in stock which hasn’t sold for a considerable period?
One of these is an opportunity. The other’s a problem.
And here are some calculations worth making…
Once you have answers to these you’ll be far better equipped to know how much of a problem the overflowing warehouse is. Without them, you’re whistling in the wind.
Once you know which excess stock is a problem, and which is an opportunity, it’s a lot easier to work out how the problem arose.
And making sure your priorities are crystal clear will help sharpen your focus. This is defined as service levels. And they’re driven by management.
Service levels concern the time, money and space behind business decisions. And your business, like every other, will have limited capacity on these.
If your service level targets are spot on, you’ll ensure the investment (in money, time or space) revolves around the products you rely on the most.
If you don’t know already, it’s time you worked it out. And merely ‘number of sales’ isn’t the way. You don’t want to wrongly apportion importance on a loss leader.
You have to define their value to your business.
Think about revenue per SKU. Margin contribution per SKU. Number of customers per SKU. Order numbers per SKU. Profit percentage per SKU.
All of these will give you a much clearer understanding of your portfolio.
Remember, we’re not just trying to sort out the problem of your existing excess stock, we’re trying to stop the problem from rising again in the future.
And to do that, we need to set good habits. One of these good habits is continuous analysis on your service levels.
By their very nature, service levels are incredibly hard to measure. But that’s not an excuse to ignore them. If anything, it’s a sign you should be focusing on them even more.
If your supply chain costs are soaring, your customers are grumbling or going elsewhere, your business goals have changed or you’re just struggling to hit target… it’s time to analyse your service levels.
But make this a regular occurrence. Don’t wait for any of the above to happen and it’s far less likely they will.
The cold-hard reality for most businesses is that the stocking strategy’s off kilter. It lacks clarity or logic.
Try asking yourself these questions…
Top tip: Your stock strategy will set the rules for assortment decision-making. Without them, you’re making decisions on nothing more than whim or conjecture. To assess your stocking strategy, download our handy checklist.
If you’re not aware of the stages of a product’s lifecycle, study the below image. Save it to your desktop. Print it off. Put it on your fridge.
Put it anywhere which will help you learn it to memory.
Now think about the most likely stage which results in excess stock.
On the face of it, the ‘phase out stage’ looks most likely. You’re phasing this product out for a reason, so it’s a natural assumption to expect excess.
The truth is, excess can come at any stage. And each stage brings its own challenges.
Here are some questions to ask yourself for every stage…
Is your new product going to offer genuine value to the assortment?
Will there be sufficient demand? And what will that demand look like? What does your market research tell you about ideal supply levels?
What are the margins and do they justify its launch?
How much of a particular product should you buy with the initial purchase order?
From which supplier should you source your products?
Get this wrong and you’ll fail on launch. Get it right and you’ll have the perfect amount of stock. But how much is the perfect amount?
You know you need more stock, but you don’t know how much more. Up until now you’ve been resting on guesswork, market intel and estimation. If you’re trying to grow, not enough stock simply won’t do.
Should you still be using qualitative models? Now you have more data, you need to use it. Adapt to a quantitative model.
What are the predicted increases in demand and how will they affect existing stock levels?
The dizzying highs of growth might be coming to an end, but spotting the maturity stage is half the battle.
There will, at some point, be a difference between forecasted sales and actual sales. When will this happen? It’s almost impossible to predict.
So stay alert and be ready to adjust your service levels swiftly.
In a similar way you can predict growth from introduction, the decline stage follows a similar pattern, just in reverse.
Naturally, you need to arm against obsolescence, lest you speed this stage up remarkably. But excess stock becomes all the more likely as you do without accurate forecasting.
At least here you’re armed with the most data possible at any stage of the process.
Top Tip: Your inventory strategy must align with the respective phase of the product lifecycle. Read our guide to product lifecycle management.
Hopefully, this blog will help you to ensure your tactics are up to scratch.
Rather than trying to rationalise whether you should eradicate a product from your assortment, it’s a far easier task to analyse the decisions for keeping it.
There are many questions you can ask yourself, or those more knowledgeable, to get a good answer to this too.
For a full breakdown, check this article. But think along the lines of…
How regular are sales?
How much revenue is made per item?
And how much of that is profit?
Is the customer base wide or narrow?
Can you offer alternatives?
If any product has a rating of less than 35/100, you simply shouldn’t be stocking it.
But your stocking index needs to be tailored individually and appropriate to the wider business.
How you set your parameters depends on each attribute’s importance. For example if you’re a new brand, total amount of new customers might be a high consideration.
If it’s crucial you stay cash rich as a company, turnover needs to be heavily weighted.
If you’re an established brand with loyal customers, number of A-customers should be.
Here’s an example for one product rated out of 100…
| Criteria | Weight | Boundary | Score | Result |
|---|---|---|---|---|
| No. Order Lines | 20 | > 30 per month | 40 per month | 20 |
| Turnover | 20 | > £5000 | £6540 | 20 |
| Gross Margin | 10 | > 20% | 15% | 0 |
| No. Unique Customers | 20 | > 5 per month | 16 per month | 20 |
| No. A Customers | 10 | > 3 | 1 | 0 |
| Service or Strategic Item | 10 | Yes | Yes | 10 |
| Alternative Stocked Product | 5 | No | No | 5 |
| Supplier Ranking | 5 | Top 50 | In Top 50 | 5 |
| Total Score | 100 | 80 |
| Score 50 – 100 | Stocked ✔️ |
| Score 39 – 49 | Transition |
| Score 0 – 29 | Non-Stocked |
Once you have a rating for each product in your assortment, it’s a lot easier to define whether it should be kept in stock or not.
You’ll be all too familiar with poor supplier performance of late. Huge external elements like global pandemics provide inescapable problems, and shift blame from the supplier.
That said, not all suppliers are created equally. And given the potential cost to your business of poor supplier performance, you must act.
But before you act, you need to benchmark.
On-time-in-full (OTIF) rate is a good place to start and often the most common KPI.
To put it simply, if the amount of complete orders delivered on time falls short of their estimate, it’s asking to be critiqued.
What a difference a day makes.
To both you, and your customer. And so a difference in lead time between expected and actual delivery is a situation ripe for critique.
Obviously before you go steaming into a difficult conversation however, think about how crucial this supplier is to your business, and the scale of the problem at hand.
If they’re a main supplier and it’s just one shipment gone awry, a constructive conversation’s probably best than cancelling the contract.
To correctly challenge a supplier you need data.
But to be frank, without data from every part of your business it’s impossible to make good decisions.
Your suppliers, customers and competitors have all been disrupted in the recent past. Some will still be feeling the constraints of the global supply chain.
But others won’t.
And as we mentioned earlier, not all suppliers are created equally.
Have any of your suppliers closed factories? Are they planning on going back to ‘business as usual’? And if so, when will that happen?
What sort of lead times are now going to be commonplace?
Information is power. And knowing the abilities of your suppliers will stand you in great stead to analysing their worth.
Make sure you collect information and update systems fast and often.
Here’s a quick fire supplier master data checklist.
The more information your supplier has, the easier it is for them to fulfil future demands.
They’re far more likely to leave you in the lurch with surprise orders, out of the ordinary volume requests or irregular order patterns.
Working out which information suppliers need to know is the easy part.
Sharing it takes dedicated effort, but could unlock better performance in your own business quite quickly.
For a full breakdown of what you should share with both those you supply, and those who supply you, download our free Excess Stock help sheet below.
With it, you’ll be able to:
