One of the most important aspects of every item based business is your inventory. Your inventory is the main source of your revenue. So it’s essential to be smart when making decisions about how much inventory you have, how much to store, and how much to reorder. It can be tempting to keep excess inventory to ensure you’ll always be able to provide for your customers. But is carrying excess inventory really the best idea?
This article will help you understand the different aspects of inventory control. As well as share some general rules of thumb.
It’s important to note that when we talk about excess inventory we aren’t talking about safety stock. We have a blog dedicated to safety stock and its relation to reorder points if you want to learn more.
So without further ado, let’s get into it!
Pros to holding excess inventory
Quicker response time
You’re able to quickly fill all customer orders as soon as they come in. No need to worry about waiting on your stock to arrive. If you can’t ship an order quickly, you’ll lose those valued customers.
Decreased risk of shortages
By keeping stock on hand, you are able to guarantee, that you will not run out of a particular item. You’ll also have less to worry about if a product is discontinued. If there is a shift in demand for a product, you’ll be able to meet (or even beat) the competition; which means you’ll 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. It’ll ensure 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 in 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 You might end up having to sell them at a smaller price because it has become outdated or obsolete.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 lower price as it gets nearer to the 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, it’s possible that you have misjudged what will and what will not sell. In doing so, you could end up with a large quantity of items that people don’t want 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 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 amount of insurance you will be paying for items will be directly related to the capital cost of the products you’re storing. 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?
When weighing out the pros and cons of holding excess inventory it’s all about comparing your carrying costs against how much stock outs would potentially cost your business. Carrying costs would include cost of capital, insurance, storage fees, material handling, administration, and any other fees you may incur for holding onto inventory that is taking up real estate in your warehouse.
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 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 Cloud will alert you when your stock hits a certain point and allows you to create a purchase order with a few clicks.