When purchasing inventory, you have to consider many factors, including customer demand for products, cost of storage, and availability with your supplier. It’s tough to predict how much inventory to keep on hand, so you may end up buying more than what you can sell, resulting in overstock issues.
Having too many items on your shelves can tie up cash and result in wastage. Plus, they occupy warehouse space you can otherwise use for storing more popular or in-demand items. But getting rid of excess inventory is like walking a tightrope—overdo it, and you run out of stock; underdo it, and you’re stuck with slow-moving items.
In this article, we’ve explained the benefits your business can reap by reducing inventory overstock. We’ve also outlined three simple steps to help you reduce surplus inventory while minimizing the chances of running out of products.
Here are the key benefits of reducing surplus inventory for your business.
You’ve already spent a lot on purchasing inventory, but now you’re unable to sell it. What happens next? Your money gets tied up until you can clear the stocks. If you get rid of excess items, you’ll be able to free some of the tied-up capital, which you can then invest in other business areas.
For every inventory item on the shelf, you pay maintenance, insurance, and storage costs, so if you have more than the required items, you end up paying more. By reducing overstock inventory, you can save on these costs. Not to forget, inventory carrying costs directly affect the price at which you sell products. In simple words, lower your maintenance and insurance costs, higher your ability to sell items at competitive prices.
When a product becomes outdated, its demand reduces and, as a result, sales go down. If you have excess inventory for such products, you’ll either have to sell them at a fraction of the purchase cost or discard them altogether, resulting in loss of money or wastage. However, reducing overstock inventory can help you avoid such situations.
Clearing overstock will benefit your business, but overdoing it can lead to out-of-stock products and, as a result, poor customer experience. Thus, take a planned approach to calculate how much stock to give up. Here are three simple ways to do that.
The Pareto principle states that 80% of consequences come from merely 20% of causes. This means, in general, just 20% of your inventory items account for 80% of your sales. Your aim is to identify this 20% and keep more of it in stock, and the ABC stock classification method can help you do that.
This method groups products into three inventory classes: A, B, and C based on their sales value. Class A items generate the most sales, class B items have moderate sales, and class C items have the lowest sales. Thus, you should maintain high inventory levels for class A items, moderate levels for class B items, and low levels for class C items.
ABC analysis helps align your stock purchases with customer demand, but it can get too technical if there are many products in your inventory. To help you with the calculations, we’ve created this free tool. All you need to do is enter the product names and their sales value for the past three months. The tool will automatically classify all items as A, B, or C. To use this calculator, you should have at least six products on your inventory list.
With changes in product demand, inventory classes also change, so perform ABC analysis every month to keep your categories relevant. If you need advanced classification, consider investing in a demand planning solution, which factors in a range of parameters, including product demand, price value, and seasonality, to classify your products more accurately.
The lifecycle of every inventory item can be divided into four stages, as can be seen in the chart below:
When products enter the decline stage, they can be tagged as old or obsolete inventory. You’ll find it difficult to sell these items, and excess stock will start piling up. Offering discounts (e.g., a clearance sale for closeout merchandise) is a good way of offloading old inventory, but you may face short-term losses. However, on the bright side, your warehouse will have more space for products with higher demand.
Here’s how you can identify obsolete inventory:
Compare month-on-month sales for the past six months, and check which products have consistently falling numbers.
For these items, offer limited-period discounts or have a closeout inventory sale. Continuously assess the impact of these offers, and increase or decrease the discount percentage accordingly.
You can also reuse old merchandise as free gifts or incentives to attract more customers or for your loyalty programs.
Offer discounts and promotions frequently if you deal in goods such as apparel and groceries that have a short lifecycle. To manage discounts more efficiently, consider investing in inventory management software with discount management functionality.
Buying in bulk is a common practice among manufacturers, retailers, and distributors. You get wholesale merchandise at discounted prices and stock enough to meet demand for a long time, but you also increase the chances of overstock. Let’s understand this with an example.
You placed a bulk order of 60,000 units of product A at the start of new year. You usually sell 20,000 units of product A per month, so the stock should last around three months. In February, however, a new product, B, was launched. Product B became an instant hit and made A obsolete. For your company, this market development has created an overstock of roughly 40,000 units of product A.
However, if you’d purchased product A in smaller batches of 20,000 units per month, there would be no overstock in February. Also, you could have used the tied-up capital to purchase more units of product B, which would have led to higher profits for your business.
Use the ABC classification method to identify items you can buy in bulk. In practice, it’s safe to place bulk orders for class A items. To automate bulk order processing and tracking of products, consider investing in an inventory management system with order management functionality.
Planning your purchases is key to ensuring you don’t have products lying on your racks for a long time. But doing that can be a challenge, especially if you sell multiple items. An inventory management system can help forecast product demand to ensure you have just the right amount on hand. You can also view inventory reports to check which items are selling well and which aren’t. Check out these resources to find the right inventory management solution for your business: