In part 1 of the excess stock blog series, we tackled the basics: What it is, why it matters, some common reasons for it, and how to effectively get rid of it from your inventory.
In this Part 2, we’ll tackle 16 tips to help your businesses proactively avoid the excess stock problems and pitfalls in your inventory.
Surplus inventory is a growing problem – even global brands like Under Armour are now warning shareholders of shrinking margins as they deal with the double challenge of waning demand and excess stock.
Where does excess stock exist in your business?
Put simply, it can exist anywhere across your entire supply chain. From too much stock on fast-moving issues that cause short-term cashflow issues to surplus stock on long-tail items that can lead to long-term working capital challenges, more stock can happen anywhere, anytime.
16 Tips to Manage Stock
#1: Set Your Service Levels
While having 100% stock availability 100% of the time sounds like a great idea, in theory, it’s not ideal in practice. Here’s why: Not all products sell at the same rate. As a result, it’s worth pinpointing which product categories perform best and which could lead to overstock issues.
To accomplish this goal, companies can use what are known as Service Levels – inventory targets that are defined by the priority of each item.
For example, you might define class “A” items as those that consistently sell out (or come close), and you might opt for a service level target of 99.9%. Class B or C items – those that sell but not as well – may be better served by 90% or even 85% service levels.
Need help setting your service levels? Check out our guide to ABC/XYZ analysis.
#2: Review Your Service Levels
Once you’ve hit your service level targets, you’re good to go, right? Not quite. It’s worth regularly reviewing these levels to ensure they still match market demand. For example, if supply chain costs are increasing while sales volumes drop, you may need to adjust service levels to match.
Given the rapidly-changing nature of supply chains and product availability, it’s a good idea to review these service levels at least once per month to ensure they’re aligned with product demand and available supply.
Here are the 5 signs that you need to review your service levels now:
#3: Assign Stock Responsibility
Who’s in charge of your stock forecasting? Here, too many cooks can ruin the broth – you need a clear chain of command when it comes to setting and maintaining stock and service levels.
For example, it’s a good idea to designate a stock planner who’s responsible for basic stocking strategies, but it’s also critical to recognize that some factors are beyond their control. As a result, you need processes in place to reduce overstock risk.
You also need to back them up with reliable sales and stock data so they have access to relevant information on-demand.
#4: Look Beyond the Inventory Value
Inventory value seems like a good starting point to determine surplus stock levels. The problem? This value in and of itself tells you almost nothing.
Consider an inventory value of $7 million. If the stock you paid for is selling like hotcakes, you’re on track for a significant profit. If stock isn’t moving, this $7 million can quickly become a liability. Metrics such as value vs stock turn, and inventory value per phase of product lifecycle can help pinpoint potential stock issues.
Tracking these key performance indicators (KPIs) is critical to provide a clear picture of where your stock is sufficient, where it’s lacking and where you may need more.
#5: Get Rid of Obsolete Stock (Even if it Hurts)
If your stock isn’t selling, you need to get rid of it. This isn’t easy – you paid good money for that stock, but hanging on to it won’t suddenly make sales go up.
Best bet? Follow these simple steps as you did to get rid of excess stock for obsolete stock as well.
#6: Look for Excess Stock Everywhere
Excess Inventory can occur anywhere in the product lifecycle. For example, introducing new products often come with a delay between acquiring stock and generating demand. Mid-phase stock often sells more reliability but market demand can quickly change. Products at their end-of-life, meanwhile, often see declining sales.
Consider that 75 % to 85% of new products fail, and even those that are “successful” may only see average results. End-of-life products, meanwhile, are often overlooked especially if they’re sitting idle in warehouses.
By monitoring for overstock issues across the entire product lifecycle, you can reduce revenue risk.
#7: Rethink Your Stock Strategy
Where you store your stock can make all the difference between appropriate and excess inventory levels.
Let’s say you have 1,000 units of well-selling products in your central warehouse, but demand is greater near your outlying facilities. If you keep all of your stock in one place, you might sell 500 out of 1,000 and have half your stock left over.
If you split this stock across 10 satellite facilities, you’re more likely to sell all 1,000 units. In other words, you need to focus on stock where it counts, not simply how much of it you have. By taking a demand-based rather than total-number approach, you can ensure availability on-demand.
#8: Optimize Safety Stock Levels
Safety stock is necessary to ensure you don’t suddenly run out of high-demand items. But not all products need the same level of safety stock.
Depending on factors such as volatility in demand, lead times, service-level targets, and the risks & impact of stock-outs, safety stock levels will look different for every product.
#9: Be Careful with Slow Movers
Slow-moving stock can leave you with more costs than benefits if you’re holding on to it for months or years. Suppliers will sometimes offer “deals” on large-quantity shipments of slow-moving stock, but make sure to do the math – from initial costs to holding costs to the possibility of writing off this inventory – before committing to any deal.
Before you commit to anything in a ‘substantial amount’ consider the following as well:
- After you factor in the long-term holding costs, are you still getting a good deal?
- How much value is the product really offering? Should you be stocking it all?
- Are there any other suppliers who would be willing to offer a similar deal but with a lower MOQ?
#10: Work with the Right Suppliers
The right supplier can make all the difference when it comes to holding too much (or not enough) stock. Here, you’re looking for a supplier that delivers what they promise, when they promise it.
This means no early or late deliveries, no missing quantities, and no replacements for specific items.
#11: Look to Lead Times
The longer your lead times, the more likely you’ll end up with excess inventory. Long lead times not only force you to plan well into the future – when anything could change – but also mean that minimum order quantities (MOQs) must often be significant to make it worth your while.
The result? Long waits for the stocks you may not need. Consider a recent analysis found that higher inventory levels combined with sluggish sales are creating an ongoing overstock situation that creates a significant “profit squeeze”.
But with supply chains still uncertain and lead times in flux, many companies have made a practice of over-ordering in hopes to meet demand.
Long lead times can cause three big problems:
- Planning too far into the future
- Higher order quantities to ensure cost efficiency
- Large purchasing quantities to cover the “gap” between one shipment and the next
Here, four strategies can help:
- Utilize local suppliers
- Prioritize supplier communication
- Look for group product purchasing opportunities
- Incentivize suppliers to prioritize your orders
#12: Watch out for Rebates
Rebates are often used by suppliers to get rid of their excess stock by transferring it to you. It goes like this: Your supplier offers money back or another “irresistible” deal that makes it seem like taking this stock is worth it. Once it’s in your inventory, however, the costs can quickly outweigh the benefits.
Often, this stems from the fact that businesses fail to complete in-depth analysis before placing large orders. By assessing key factors such as lead time, total costs and potential sales performance before placing orders, you can reduce your total risk.
>> Success Story: Tiger Auto Parts, Canada optimizes it’s inventory with Slim4.
#13: Make use of Master Data
Master data makes it easier to make good decisions. Master data includes information such as:
- Product details (SKU numbers, item descriptions, etc,)
- Selling price
- Supplier details
- Expiration dates
- Demand history
- Holding costs
#14: Keep this Data Clean
When it comes to stock data, the old saying holds true: Garbage in, garbage out. If your data isn’t accurate, relevant, and timely, any decisions made about stock are more hit or miss than right on target.
From incomplete data sets to human error to poor forecasting algorithms, dirty data leads to ineffective results. As a result, it’s worth regularly reviewing your data to ensure it’s clean, consistent, and complete.
#15: Keep this Data Up to Date
Data also needs to be up to date. This means deploying software solutions that allow all teams to easily enter data and make it possible for teams to collaborate on data sets and drive better decision-making.
Put simply, better data is everyone’s responsibility. This starts with stock planners and executives, but also includes warehouse staff and sales teams. The more accurate and timely data you get, the better.
#16: Stay in it for the Long Haul
Dealing with excess inventory isn’t a one-off project. Instead, it’s an ongoing process that requires continual management and regular adjustment.
By approaching both stock outs and additional stock issues as evolving challenges rather than singular problems, you can develop a reliable framework that lets you respond to issues as they occur.
Bottom line? Dealing with excess stock isn’t always easy – but it’s worth the effort over time.