Anytime you have empty shelves leading to lost sales, it makes it tempting for sellers to order as much stock as possible the next time. However, while no one wants to lose sales due to out-of-stock items, overstocking can cost you even more.
On the surface, having excess inventory doesn’t seem as bad as running out of in-demand products, but looks are deceiving.
While some planned extra stock, called safety stock, can help you take advantage of great deals, too much can get out of hand quickly. Overstock inventory can easily become an issue that hampers your ability to grow.
Running a successful product-based business isn’t about never running out of product. It’s about balancing meeting customer demand while controlling costs.
Keep reading to learn about overstocking, its causes and effects, and how you can use insights from Cin7’s inventory management platform to avoid it.
Overstocking, also known as surplus or excess inventory, is what happens when you purchase more inventory than you need to meet customer demand or more inventory than you can sell in a reasonable time. As a result, you have products sitting on the shelves or waiting in storage for several weeks or even months before someone buys them.
Unlike safety stock, which you purposely buy and keep on hand to avoid stockouts, overstocking happens unintentionally. Since it’s impossible to perfectly predict the future and see the precise number of items you’ll need to meet actual customer demand, some amount of overstocking is expected in the course of running a business.
Overstocking only becomes a problem if you regularly have too much excess inventory, as it can cause issues such as high costs and less cash flow. For businesses with seasonal sales spikes, navigating the balance between having enough product on hand and overstocking can be particularly tricky.
Before we dive into the consequences of too much overstocking, let’s take a look at what causes it in the first place.
Overstocking is one of the classic warning signs of inventory inefficiency, and it often happens when you don’t have clear visibility into your inventory process or customer demand. Lack of transparency in your business makes it hard to know how much product you need in order to meet demand, which results in excess stock.
The most common causes of overstocking for product sellers are:
Overstocking can lead to inventory control issues that make your business sluggish, such as high costs, lower revenue, and product obsolescence. The more surplus stock you buy, the fewer resources you have to help you grow.
Here’s a closer look at how the negative effects of overstocking impact your business.
Surplus inventory takes up valuable storage space, increasing warehousing, utilities, and maintenance costs. Plus, overstocking means that you have less room to store better-selling products, and you may have to purchase additional warehouse space, which further increases carrying costs.
The longer your excess inventory remains unsold, the more likely you’ll have to spend more on holding, handling, and transportation to accommodate other products.
When you have overstock inventory, unsold goods tie up your cash. Because you can’t convert those products into revenue, less money flows into the business while storage costs continue to accrue.
When this happens, your cash flow becomes tight, and you don’t have enough to invest in sales and marketing strategies that could bring more customers to your brand. That can be a crucial loss for new and small businesses. One study found that 38% of startups failed due to a lack of cash or failure to raise funds
Long inventory turnover cycles lead to a higher expiration risk for perishable items like supplements, foods, and cosmetic products. If you can’t sell products before expiration, you must write them off as a financial loss.
For items that don’t expire, overstocking still leads to a higher risk of product obsolescence. While electronics often become obsolete quickly, obsolescence is especially relevant for seasonal inventory that can lose value if not sold while topical. Similar to expiration, obsolete products often result in a loss.
When you have more supply than demand, it’s common to turn to strategies like discounts and promotions to eliminate overstocked inventory. While this is an effective way to free up storage space and avoid complete inventory liquidation, it reduces your revenue, lowers profit margins, and cuts into your bottom line.
Discounting items won’t spell the end for your business if you have to do it now and then. However, frequently overbuying and relying on price reductions to move products can make it impossible to turn a profit or break even.
It may sound counterintuitive, but buying too much of one product puts you at risk of understocking other items. If you allocate warehouse space to products that aren’t selling, you have less room to hold safety stock for your faster-moving items.
As such, this leads to a higher risk of selling out of other products, which can cause negative customer experiences and even the loss of loyal buyers. In essence, surplus inventory acts as a dead weight that makes it harder for you to run an agile business and respond to high demand for other items.
While supply chain disruptions are out of your control, most overstocking causes fall under poor inventory management practices and lack of visibility into your business. In short, it’s possible to prevent overstocking with the right tools.
One report found that despite software advancements, 67.4% of supply chain managers still use Excel to keep track of inventory.
Lack of accurate information and transparency in your inventory levels will lead to continual overstocking. When you don’t know exactly how much you have at all times, it’s easy to err on the side of caution and reorder too much product to avoid stockouts.
To end the cycle of excess inventory and free up your cash flow to enable more agile growth, you need to know how much product you have in real-time. It’s also crucial to have historical sales data and tools to analyze past trends to accurately forecast demand throughout the year, including busy seasons like holidays.
Cin7 inventory management software helps you avoid overstocking and its consequences by enabling Connected Inventory Performance (CIP). With Connected Inventory Performance, you can stop relying on spreadsheets and manual workflows.
Instead, Cin7 gives you access to real-time inventory data, process automation, and powerful insights that enable ordering the correct product amounts to meet demand. Let’s take a closer look at how you can use Cin7 to reduce overstocking, free up capital, and scale your business.
Cin7 gives you access to continuous real-time stock levels, so you don’t have to wait for manual inventory counts to know how much product you have. As a result, you get true visibility into your inventory and inventory turnover rate, allowing you to make data-driven decisions about which products to prioritize and exactly how much you need to reorder.
With Cin7, you can also calculate the cost of goods sold (COGS) in real time, helping you find discount prices that move surplus stock while minimizing the impact on your profit margins.
Cin7 reports account for past sales trends to help you better adjust for seasonal fluctuations. With this information, you can make informed decisions about your product mix to avoid shortages and excess stock while confidently taking advantage of bulk purchase opportunities.
Instead of relying on large amounts of safety stock, you can use Cin7’s Smart Buyer feature that automatically reviews transactions across the entire company and suggests which purchases to make to meet expected order fulfillment needs.
You can also use Cin7 to calculate the optimal reorder point based on sales volume and lead time. When stock levels hit the reorder point, you can place a replenishment order to ensure the items stay in stock without risking excess inventory.
When you rely on heavily manual processes, achieving optimal inventory is almost impossible. Instead of making informed decisions, you take a shot in the dark every time you order products. You need data to help you determine order lead times, when to replace a slow seller with new products, and better forecast demand.
Real-time inventory levels and data-driven insights are crucial for achieving that balance of meeting demand without ordering too much stock.
Cin7’s inventory management system provides full visibility into product levels and empowers sellers to leverage their data into a smarter procurement strategy. This way, you can maintain an excellent customer experience without impeding cash flow, ensuring enough resources to take advantage of growth opportunities.
If you’re ready to get your surplus stock under control with real-time insights, accurate demand forecasts, and smart reordering features, request a Cin7 demo today.