Pros & Cons: The Impact of Excess Inventory
Carrying and managing excess can be very costly, and it's important to know the risks involved. We examine the causes of overstock as well as its impact on inventory management and supply chain operations...
What Is Excess Inventory?
Excess inventory refers to products, raw materials, and components that have yet to be sold or used, and therefore remain in storage. It is vital to business to maintain the right balance between inventory levels and costs — but this is easier said than done.
What Causes Excess Inventory?
Excess inventory — also known as overstock or excessive stock — is typically the result of a poorly executed demand forecast and inventory management strategy. The carrying costs associated with excess inventory can be quite significant and, in some cases, can ruin businesses.
Generally speaking, excess inventory occurs when supply outpaces demand, resulting in slower-than-anticipated inventory turnover. When this happens, businesses are forced to strategize, often on the fly, in order to recoup potential losses that may occur; excess inventory either needs to be sold (likely at a discount) or thrown away as waste.
Excess Inventory: Benefits & Risks
Though excess inventory is generally not a good thing, there are instances in which it’s an integral and planned portion of a larger inventory strategy.
Pros of Overstock
- Avoid out-of-stocks. Holding excess inventory is an important insurance policy for unforeseen spikes in demand. Overstock can be used to fulfill order at levels that were not planned for.
- Financial strategy. Excess inventory may also be a part of a larger tax or accounting strategy.
However, when companies are forced to store products beyond their estimations, their bottom line can take a major hit: profits reduce while working capital increases. Excess inventory can have many negative impacts across supply chain, which are often interconnected, and can be a suck on cash flow. Here are some of the ways excess inventory can throw a wrench in your CPG supply chain:
Cons of Overstock
- Products are likely to be sold at deep discounts. In the absence of strong demand, slow-moving (or inert) products must be priced to sell. That is, they must be sold at a discount in order to be unloaded, sometimes to liquidator resellers. Discounts can harm the marketplace. They can also hurt a brand name’s and associated price points that are often built on reputation, quality, and price. Lower prices means higher COGs (cost of goods sold) which means lower profits. Relationship managers must adapt. Markdowns need to be funded as well. (Retailers may also participate in giveaways in order to clear room for new inventory.)
- Additional investments. The ability to unload excess inventory requires the re-deployment of sales resources, such a sales reps who may already be stretched thin. Markdowns must also be funded.
- Obsolescence / End-of-Life (EOL). Products that are facing obsolescence may be sold in bulk to discount retailers that can move them into the hands of consumers quickly. Running conversely with product (or component) obsolescence is the pace of innovation and speed to market for many CPG products and product categories. Here’s how one electronics components director described the push and pull of obsolescence:
As manufacturers reduce the lifespan of many parts, and innovations in technology are occurring at faster and faster rates, this results in an increase in parts becoming obsolete and no longer produced by the manufacturer. The demand for this product, however, may still be present, resulting in a severe mismatch between supply and demand.
- Disposal costs. Products with expiry dates, or those that are becoming obsolete, are ticking clocks that must be sold in a timely manner. If they’re not, they’re either sold at a deep discount to make room for other (faster-selling or newer) products, or they will be thrown out. The disposal of products, however, can be very expensive and must be done properly and in accordance with the law. Donation is a cost too.
- Increased holding costs. An unforeseen surplus in product means that there must be a place to store it. And it can be expensive to expand warehousing capacity. This clears warehousing space for new products or other more-in-demand products, which may have a better chance of bringing in revenue.
- Transshipment and repositioning costs. Let’s say that excess inventory is sold to a discount retailer at a deep discount, but that retailer is located on the west coast — 2,000 miles from your east coast-based warehouse. That’s a cost you’ll have to eat as well, adding to the cost of goods sold. This ties back to having an agile warehousing strategy that takes into account warehouse locations that house inventory, and whether or not they are centrally located.
Accurate Demand Predictions = Less Excess Inventory + Lower Costs
Excess inventory can have a domino effect across supply chain, causing a flurry of unforeseen downstream costs. Many CPG companies who know these realities of this fallout also understand that excess inventory can push business to the brink.
One effective way to avoid excess inventory is to have accurate consumption-driven demand forecasts available. When sales teams are confident in predictions, inventory management teams can help to support future demand targets. When sales are forecasted accurately, the entire supply chain can benefit, including inventory, which can plan to have the right number of products in the right place at the right time.