Most retail store owners find it challenging to stock the appropriate amount of inventory. Overstocking can result in expensive excess inventory. Conversely, if you are understocked, sales are lost. A majority of small business owners at Amazon still use offline inventory software or do not use any inventory software at all for Amazon sales forecasting of their customers.
This can result in excess inventory, and it is a serious risk.
What steps would you take to make informed decisions in order to stock your store? You can determine how much stock to keep in your inventory by using inventory management and sales data. You can suffer negative effects on productivity and profits if you do not make informed decisions.
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What is excess inventory or overstocking?
When stores purchase more products than they can sell, overstocking occurs. Overstocking is also known as “excess stock” or “surplus stock.” Retailers over-order inventory, which leaves them with too much stock in store shelves or warehouses, hurting their profits.
Why is there an excess inventory?
A lot of factors lead to overstocking, but luckily, you can mitigate nearly all of them by carefully calculating, planning, and analyzing your inventory.
Overstocking inventory can be caused by a number of factors, including:
- A miscalculation of customer demand
In the face of COVID-19’s limits to in-store purchases, many retailers are experiencing an information deficit about their customers’ behaviors. In the world of stocking, if you can’t determine whether a customer is a new or repeat customer, you have a huge hole in your data.
Your products can become obsolete if you underestimate your customer’s demand, resulting in unused excess stock. The storage space this stock occupies could have been used to launch new products and drive sales.
- Fear of being out of stock
The fear of out-of-stocks or stockouts is well-founded. Every year, retailers lose $1 trillion to these problems, including every E-commerce platform Amazon, Walmart, etc. The effects of stockouts and low inventory are compounded when stores have stockouts.
The loss of revenue is not the only potential cost; you will also incur long-term costs, like disgruntled customers and a negative impact on your brand’s reputation.
- Marketing that is ineffective
Engaging your customers and promoting your business can be accomplished with marketing. A store owner who relies too heavily on marketing alone to sell his products may have problems. Even if you set up a compelling marketing campaign, don’t assume that your customers will want to buy large quantities of goods from your vendors. Overstock can be an unfortunate consequence of this method.
The data from previous sales and data about client behavior should be the basis for your purchase decisions. Using guesswork or assumptions is not a good idea. Unless you do this, you might find that your store has too many immovable items in stock.
- Inadequate management of inventories
You need to focus on inventory and in-stock items if you wish to run a brick-and-mortar business successfully. Consider how to successfully mitigate overstocking by paying attention to inventory costs as well. Another reason for excess inventories is an inability to understand these important aspects of inventory management.
Stock costs are comprised of three major types: purchase costs, shortage costs, and carrying costs. When you hold and store your inventory, you pay carrying costs. Net costs can also be affected by shipping costs, opportunity costs, warehousing costs, and depreciation costs, in addition to labor salaries.
It is difficult for you to accurately estimate the cost of goods and margins of your new inventory. Having these estimates is the first step in managing your inventory. Avoid overstocking by using this information.
Seasonality affects nearly every industry. If you’re in the financial industry, Christmas is a good example of how seasonality impacts retail tax season. The same goes for planting versus harvesting in green industries.
Can you anticipate seasonal purchasing impacts when it comes to stocking your store? Also, do you know which ones impact your store? Unprepared stores do not plan their prices accordingly during these buying seasons. During these lucrative periods, companies that do not leverage multiple channels to sell and market their products will leave themselves with overstocked products.
How does excess inventory affect customer service?
Overstock can cause significant problems (and high costs) for your retail store, regardless of the cause. As a result, you’re losing productivity and profitability in your retail store when excess inventory takes up valuable time and resources.
- An overstock of inventory can negatively affect the quality and degrade goods
If you have large amounts of excess stock, you are likely to have low inventory turnover. It means that your stock may not be turned completely on a regular basis. In some cases, excess stock on shelves in warehouses can begin to deteriorate and rot. Therefore, companies may sell off perishable or substandard stock at a lower price rather than dispose of it and lose its value. Your business can experience a significant loss of profit if you discount stock or get rid of it altogether.
- Excess inventory can lead to obsolescence of stock
Excess inventory is typically the result of over-promising your customer demand and/or purchasing too many incorrect products. If there is no demand for those items over time, then the stock would become obsolete. In addition, obsolete inventory is not profitable. When excess items cannot be sold or, worse, when there is no demand, they must be disposed of
What can be done to prevent excess inventory?
It comes down to inventory management to avoid overstocks and stockouts. You overstock your store because of blind orders you place without knowing your inventory. The impact of overstocking can be reduced on your business both in terms of its cause and effect when accurate demand predictions are made through POS and customer behavior data.
To reduce overstocking and improve stocking practices, consider following these five tips.
- Software for inventory management is a good investment
A retail inventory software program that tracks analyzes, and calculates a lot of the data for you can bring a lot of value. In almost half of the small businesses, inventory tracking is either not performed at all or done manually. Still, there are software options that can help you decide what to order, when to order it, and how much it will cost.
- Study the economic and market trends
Keep an eye on economic and market trends so you can predict supply chain fluctuations. By doing so, you can reduce the risk of overstocking your inventory. As such, you should be aware of how your demand might change in the future so that you can prepare accordingly. Retailers can use Google Trends to gauge product interest over time for determining stocking levels, as it offers other metrics which can be used to determine stock levels accurately.
- Maintain a regular inventory audit
Conduct inventory audits on a regular basis. In order to perform an audit successfully, you need to understand and evaluate your key performance indicators. To this end, establishing inventory management targets is a beneficial first step.
KPIs for inventory management can be determined based on data such as:
- Cycle time. The time it takes from the manufacturing of a product to its sale
- Inventory turnover rate. This is a measure of how quickly items are sold and replenished
- Inventory count. Count of all the inventory in each ABC category
- Order fulfillment time. Timing of when a product is filled and ready to go for sale/delivery
Avoid overstocking and raise Profitability with Inventooly
In order to accurately measure inventory mix, reduce waste and provide better services, you’ll need more accurate information. No need to worry; reach out to Inventooly for inventory management Amazon services that work. Regardless of your industry, our inventory optimization software and managed services can reduce downtime substantially, as well as deliver substantial cost savings.