Pros and Cons of Holding Excess Inventory
One of the most important aspects of every item based business is your inventory. Your inventory is your main source of your revenue, so it is essential to be smart about making decisions about how much inventory you have, how much you should store, and how much to reorder.
This article will help you understand the different aspects of inventory control, as well as share some general rules of thumb.
Pros to holding excess inventory
Quicker response time
You are able to easily and quickly fill all customer orders as soon as they come in, without having to worry about waiting on your stock to come in to ship their order out. Customers can be lost if you can’t ship an order quickly.
Decreased risk of shortages
By keeping stock on hand, you are able to guarantee, up to a certain point, that you will not run out of a particular item, and you have less to worry about if a product is discontinued. Should there be a shift in the demand for your product, you are more able to meet (or even beat) the competition; you will be more likely to be able to sell your excess inventory at an ideal price.
By keeping excess inventory, you are able to work to make sure that your shelves are always full, and that your store always has a neat and tidy appearance.
Cons of holding excess inventory
Tying up Cash flow
The more inventory you have on hand, the greater the amount of the business’ capital is tied up. You will risk slowing down your business’ cash flow.
Risk of inventory becoming obsolete
The value and quality of your product decreases the longer you keep it on stock. You have to make it a priority to sell your inventory while they’re new to the market. Smart phones, for example, are updated almost every six months, so you have to sell your stock before new versions arrive. You might end up having to sell them at a smaller price because it has become outdated or obsolete. Similarly, if you are selling perishable goods, you would have to sell them at a much lower price the nearer it gets to its expiration date. You would potentially lose money on the item if it must be sold below cost in order to clear it out.
Risk of item not selling
By keeping excess inventory on hand, it’s possible that you have misjudged what will and what will not sell, and in doing so, you could end up with a large quantity of items on hand that people do not wish to purchase. Again, you might have to sell at a steep discount, or sell below cost to move the inventory out of your warehouse.
Higher storage costs
Excess inventory means extra space needed for storage. Extra space also means extra costs, and since you have to include those extra costs in your price, you might end up losing to competition with other sellers because your price is too high. Even if you have your own warehouse, you would still be having extra costs in maintenance, and you also risk not having enough space for new items.
Risk of natural disasters
Any type of stock is always at a risk of being destroyed or damaged by fires, floods, or other natural disasters. Having less of it in excess, however, would incur smaller losses should these natural disasters happen.
Higher insurance premiums
The more inventory you keep and the longer you keep it, the more insurance you pay on it.
So how can you keep the perfect inventory balance?
While it is true that there are different ways to get around many of the cons on the list, it is important to keep in mind these very real issues that present themselves when dealing with keeping excess inventory on hand.
In many cases, you will probably find that keeping additional inventory in stock is a good thing. You have probably found that having enough of a hot-selling product is a constant problem. Rather than come up short when a customer is eager to buy, it is wise to keep a few more in the back, in reserve so that your shelves are never empty (which doesn’t look good for any retailer).
One way to to help ensure that you always have a good balance of inventory is to use software specifically designed to manage item based businesses. For example, inFlow Inventory will alert you when your stock hits a certain point and allows you to create a purchase order with a few clicks.
You can download the free edition to see if it’s a right fit for your business.