Surplus stock or overstock in your inventory creates a host of ill effects, from the cost of holding it to the stock going obsolete to missed opportunities and many more.
In this part-1 guide, we’ll break down the basics of excess stock, explore the risks of holding it, help you identify its symptoms, and discuss the steps you can take to solve overstock issues from your inventory.
The goal of this blog is to help you understand the concept of ‘Excess Stock’. Already know the basics? Skip to the final part of this blog on how to get rid of excess stock.
What is Excess Stock?
Also called overstock or surplus stock, it refers to the portion of products in your inventory that is not expected to be sold any time soon.
Worth noting – Backup stocks, safety stocks and etc. are not ‘excess stock’. For example, if SKU-1234 is your top-selling item, you probably have
- Safety Stock – in case there is an unexpected fluctuation in demand during the lead time or if there are some supplier constraints
- Cycle Stock – to replenish that product quickly,
- Complementary Stock – any additional stock that exceeds your replenishment stock
These types of stock are not Excess Stock.
Risks of Holding it:
The biggest problem with overstocked inventory?? It costs you more money than you might realize. In fact, you pay for excess stock (at least) three times:
- Wasted Investment – First, is the initial cost of buying the stock. Plus, the logistics & transportation costs
- Avoidable Cost – Next is the continuous holding costs to store, maintain, and any interest (if paid) for this inventory that you don’t need
- Missed Opportunities – The final ingredient to add to the mix is the opportunity cost. Think of all that essential working capital that would have been better invested elsewhere!
Adding to the complexity of this problem these stocks will be a total loss if that particular surplus product becomes obsolete. It further affects both the fast and slow-moving items differently.
- On fast-moving items it causes short-term cash-flow issues
- On longtail items it causes long-term working capital & cost issues
As a result, it’s critical to take action against surplus stock ASAP.
Symptoms of Holding Excess Inventory:
Even retail giant Walmart is feeling the impact of holding too much stock — In one of their N. America location, inventory has risen 32% through Q2 2022 due to inflation and supply chain issues, there is an ‘overflow’ in stores.
So it is essential to recognize the symptoms of excess inventory, so you can be better prepared to avoid the consequences of holding it.
1) Pile-Up in the Warehouse (Overcrowded Warehouse)
When logistics see volume increase it leads to a pile-up of stocks in your inventory, this might further lead to space shortage inside the warehouse just as we saw in the above Walmart case.
In the above Walmart case, their excess inventories were stuffed in their backroom and additional items were sitting in pallets in their store aisles.
For many companies, over-stocked inventory is physically visible. In fact, this can often be the very first thing employees see when they arrive at work. Put simply? The warehouse is not big enough for the overstock you have — and it’s not moving.
(In some cases, this symptom is overlooked because looking at something for a long period of time makes it seems familiar — the same thing happens with inventory as well, when the procurement manager or purchaser doesn’t realize they have an overstock issue even after seeing a pile of SKUs)
The issue can become so severe that businesses require outside storage or even investment in new facilities. A further consequence is that the warehouse processes appear cluttered and lack serenity.
2) Stressed Working Capital
The discomfort of carrying overstock is often felt by the finance department. Finance will see an increase in stock investment and in capital investment KPIs like Inventory Value. This might leave working capital ‘in the red’ or increase in debt.
One method used by financial managers to analyze inventories is through liquidity, i.e. evaluating the company’s ability to honor obligations using the money currently in the bank plus monies to be received, but not including the sales of current inventory.
Having too much capital tied up in stock often leaves businesses illiquid, forcing them to increase their reliance on debt. If the excess inventory is hampering liquidity, the financial manager often insists that inventory be reduced.
3) Regular Fire Fighting
While Inventory Managers will see their overstock KPI like Inventory Value vs. Stock Turn, worsening and Inventory Planners will see their Overstock Exceptions and Stock Days increasing in their daily tasks.
Based on your business rule configuration, you will see the level of excess stock boundary or value of KPIs equivalent to that above the desirable limit and engage in regular overstock management activities.
By the time you’re in this situation, it is often too late to perform a thorough inventory analysis to see which parts should be reduced. Optimizing stock isn’t just lowering levels of inventory, it’s having the right part in the right place at the right time.
Reducing stock in a way that doesn’t adhere to an overall inventory strategy ultimately results in quick changes that achieve the short-term effect of lowering stock, but run the risk of lowering customer service through stock-outs.
Now you know the symptoms that you might have too much stock, let’s have a look at some common causes that our consultants have come across repeatedly.
1. Poor Demand Forecasting
Many companies are prone to overstock that can pile up due to the number and variety of products/items needed. They are more likely to deal with –
- Large product assortments
- Irregular demand patterns
- Slow-moving parts
- High service level requirements
- Product suppression/substitutes and more
Irregular demand patterns and slow-moving parts require different forecasting and inventory models than used by common inventory and forecasting systems. Additionally, as new model years are released, being able to utilize historical demand appropriately is important.
2. Supply Risks
Regularly occurring inconsistent supplier lead times. Inconsistent lead times can cause over-ordering of stock to prevent potential stockouts.
3. Complex Supply Chain
Multi-site or multi-echelon supply chains can lead to delayed or canceled stock, which may prompt companies to order surplus stock when it is available.
4. Poor Replenishment Calculation
Parameters on which replenishment is calculated are incorrect and also by not using the right efficient method for replenishment calculations.
For example, not including all parameters like stock on hand, lead time, desired service level, and product life cycle management phase while calculating the minimum and a maximum number of units to stock can lead to slowly-growing excess stock levels.
5. Miscalculating Safety Stock
If safety stock levels are only reviewed once every six months, they may be well over-inflated compared to potential demand, leading to an accumulation of additional stock.
6. Product Life Cycle Management
All products have a life cycle that sees an uptick in demand followed by a plateau and a slow decline. If stock levels aren’t adjusted when decline beings to happen, the result is excess inventory.
7. 100% Stock Availability Obsession
More availability means better service levels, but 100% availability comes with a significant cost, so different products need different service levels.
8. Obsolete Stocks
Unexpected trend changes in a product can beat our forecast and make the product become obsolete.
Extra stock is bad for business. It takes up valuable warehouse space and costs you a lot of money while it becomes obsolete. So how do you get rid of it?
>>Success Story: See how SPAR, a global retail brand in 48 countries attained service levels in excess of 99.5% in Netherlands using Slim4.
How to Get Rid of Your Excess Stock:
So, what can you do with that excess inventory now? one piece of advice our consultants suggest more frequently is to “Burn it”, burn the surplus stock to get rid of it easily. Caution: Not appropriate for flammable items.
Jokes apart, writing off obsolete inventory will come at the cost of your margins. Accepting that they no longer have value or have a negative value (due to holding cost) for your business can be a hard pill to swallow and this won’t impress the finance director or the board.
The original investment in these items has already been lost, and continuing to let them take up space in your warehouse will only make these losses worse. This is an example of the “sunk cost fallacy”, so getting rid of it is the most cost-effective choice.
To eradicate surplus inventory from your operations while still keeping the potential financial impact to a minimum, we at Slimstock have outlined 4 simple steps to help you eliminate the surplus stock that is holding your business back.
By following these tips, you will be able to minimize inventory costs and free up working capital, both of which will be music to the financial director’s ears!
4 steps to “painlessly” remove excess stock:
1) Understand the Size of the Problem
First start with Inventory Value, as it’s where a huge amount of your capital is invested. It is also probably fair to say inventory value is where your excess stock problem first reared its head.
A sharp rise in inventory value should ring alarm bells.
But many struggle to see past inventory value. And without segmenting the value held by individual stocks, it’s impossible to see the problem from the opportunity.
And this leaves a bigger problem, in that most have no idea how much overstock they actually have.
So, check which items have been stocked above the desired limit, calculate their quantity, and for how long it’s not been sold.
- 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, for example – either the excess item could be obsolete because they are not sold anymore or their shelf life is not valid or product life cycle stage is in the decline phase. Read our guide to product lifecycle management.
Once you have answers to these, you’ll be far better equipped to get rid of your additional stock. Without them, you’re whistling in the wind.
2) Remove it from the Administrative Process
Make a note of those stocks that are considered excess. Once you know which additional stocks are a problem, and which are an opportunity, it is a lot easier from there.
After identifying, the last thing you don’t want to do is order more, so set these items to not buy anymore within your ERP (make non-stocked).
For obsolete articles, ensure that it is removed from your ERP and from other transaction systems as well (if applicable). If that’s not possible, at the very least make sure that purchase and sales orders for such items can no longer be placed.
3) Sell the Stocks
What do you do with those additional stock once it has been identified and removed, and the appropriate administrative and financial actions taken?
- Find a buyer – Some of our customers had good luck with identifying the last customer who ordered it and making them an offer they can’t refuse. Alternatively check within your network or with other buyers will they buy in bulk for a discounted price
- Supplier Buyback – You can also check your supplier if they offer a buyback or can they take their old stock back if returns are defined in your contract
- Donate it – Depending on your business, another idea is to see if it can be donated to a charity or non-profit and reduce your tax using it.
- Recycle – Works mostly for manufacturing companies.
- Sell it at a Discount: There is more way to discount than giving an actual discount, like as a free product for order over certain price or as a multi-discounted item (buy 3 get 1 free)
- Bundle Items Together – If you have multiple items in excess, bundle them together at a discount to see if you can recoup some of your losses
- Double or Triple Expose Items – Especially for retail, that is giving it more display space or placing the overstocked items on more shelves of the store, example- in the front display, promotional section and etc.
If needed, give sales and operation a few weeks/months of time to sell those stock. Specify what date you will get rid of it as well to minimize the loss.
4) Keep a Clean Data
You might be asking yourself at this point: “Why not take the above actions first while the stock is still in the warehouse?”
Based on our experience, trying to remove obsolete stock while it remains on premises often results in it remaining on your balance sheet at the end of the year.
This leads to the final step, make sure all the systems are kept up to date when stock changes are made.
To learn more about Business rule configuration and best practices around it, get in touch with our team
In part 2 we will discuss how to prevent future excess stock to occur in your inventory.