Excess Stock is a term used in inventory management, and is often called a number of different things; overstock, stock surplus, excessive stock, or excess inventory. No matter what you call it, one thing that remains constant is the threat excess stock represents to your company’s bottom line.
Companies that carry excess stock levels in their inventory typically find that the issue was caused by poor management of demand forecasting and replenishment or not properly tracking the life-cycle stages of a product.
Excessive stock levels come with many different cost considerations that organizations should be concerned about. First off, there is lost revenue associated with products being in inventory with little market demand. There are company dollars tied up in capital that is directly linked to the original purchase of the goods and there are associated costs to storing the inventory, sometimes referred to as “carrying costs”.
Carrying costs add up quickly across a number of different factors including, rent or mortgage payments, equipment costs, labor cost, utilities, insurance and interest that accrues on stock that has not been sold.
Excess stock is best classified as a declining stage of the product life cycle, which is represented in the graph below. There is typically demand for the product, but it is beginning to phase out and organizations that do not actively monitor the demand stages of all their individually stocked items run the risk of getting stuck with a large quantity of excess stock due to poor reorder or replenishment practices.
If not managed properly, a company can hope to sell off most of their excess stock to break even on their investment or only lose a small percentage of profit. That is of course best case. Excess stock that is not liquidated typically transitions to obsolete stock, which almost always leads to a large and painful expense on the books.
Advantages of Excess Stock
Besides the financial burden of carrying excess stock levels, there are a few advantages to always having inventory available. Below are three reasons why having excess inventory might be beneficial to your operations.
Higher Service Rates (Order Fill Rates)
Always having inventory on hand means always having inventory to sell when there are opportunities. However, having a 100% fill rate is not always the best thing when you are trying to effectively manage your costs associated with your inventory. Smart inventory planners know they need to balance having low levels of inventory while also meeting a desired service delivery rate as close to 100% as possible. At EazyStock, we call the process of attaining low inventory levels while maintaining a high service delivery level “inventory optimization.”
Higher Safety Stock Levels (Buffer Stock)
Higher safety stock levels result in there always being inventory available for when sales are made. This will help reduce lead-times of delivery, avoid stock outs and keep your customers happy. Conversely as excess stock levels go up, so does your risk, as well as, the financial strain on your business. Companies that leverage an inventory optimization software like EazyStock have the ability to more accurately calculate safety stock to ensure unnecessary replenishment is avoided. Watch a demo to see how this is accomplished.
Bulk Purchase Order Savings
Most small businesses will see savings when purchasing supplies in bulk quantities, as most suppliers offer discounts to customers who order larger quantities. Business can also save on shipping costs for one large order instead of adding up shipping and handling costs from multiple smaller batch orders. The risk with committing to larger batch orders is the market uncertainty of that products demand. On the flipside, companies that can intelligently predict their demand and forecast accordingly, will be able to strategically optimize their replenishment processes to obtain optimized pricing from suppliers while not burdening themselves with orders to large.
Disadvantages of Excess Stock
Although there are a few operational advantages of carrying excess inventory, there are a number of financial reasons why you should not. Below are three of the top reasons why you need to continuously monitor your stock levels against your product life-cycles to ensure you keep inventory levels healthy.
High Carrying Cost & Opportunity Costs
If your company holds a high level of inventory, it ties up business funds that the company could use in other areas such as research and development or marketing. New product development and marketing can bring additional business to the company, but holding high inventory levels does not.
The cost of the inventory is not recouped by the organization until the company sells the inventory or uses it to build customer orders. There is also opportunity cost in carrying large quantities of slower turning products. These products eat up space in your warehouse when you could be holding faster moving, higher demand products instead. If you struggle with balancing warehouse space allocation, then you will want to do some research into ABC classification best practices.
Increased Storage Costs
Inventory storage is another cost of holding excess stock in a business. The cost of warehousing can include the warehouse space, utilities and maintenance of the storage area. Some supplies may require additional maintenance, such as temperature control to preserve the quality of the material. Companies that reduce inventory levels can store materials in a smaller area in the business and use the extra space for new product development. Some companies can reduce inventory levels down by up to 30% by simply improving their forecasting methods and replenishment practices.
Quality Reduction & Product Degradation
Storing excess stock can lead to quality problems such as degradation and potential obsolescence. Companies may stock high levels of inventory in anticipation of demand for a recurring order with a long standing customer, however customers may change specifications or require different materials for future products over time. In this situation, the company must purchase new materials and supplies to build according to the new customer specifications, which leaves large quantities of excess or in some case obsolete inventory.
Businesses can identify and isolate quality problems easily with smaller quantity or reorder purchases. For example, in EazyStock, reorder points and replenishment parameters are automatically set per each inventory SKU, which reduces a company’s risk of ordering too much stock.
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