One of the most important aspects of every item-based business is your inventory. Your inventory is the primary source of your revenue. So it’s essential to be smart when deciding 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? How do you know when you have too much inventory on hand? What happens to excess inventory if you’re unable to sell it?
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 discuss excess inventory!
What is excess inventory?
Excess inventory refers to any surplus of goods or products that surpasses the immediate or anticipated demand from customers. Therefore, any inventory you have that is not utilized or sold within a reasonable timeframe is considered excess inventory.
As mentioned above, excess inventory does not include safety stock. Safety stock is when you deliberately carry too much inventory on hand to pad your business from unknown factors such as shipping delays.
So why is too much inventory bad? Well, the truth is sometimes it’s not. Sometimes having too much inventory on hand can be a good thing. Let’s examine all the pros and cons of carrying excess inventory.
Pros to holding excess inventory
Quicker response time
You can quickly fill all customer orders as soon as they arrive—no need to worry about waiting for 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 can guarantee that you will always have a particular item. You’ll also have less to worry about if you discontinue a product. 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 excellent price.
By keeping excess inventory, you can 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 decrease the longer you keep it in stock. You have to make it a priority to sell your inventory while it’s new to the market. Smartphones, for example, are updated almost every six months. So, you have to sell your stock before new versions arrive. Otherwise, you might end up having to sell them at a discounted 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 closer to the expiration date. You could lose money on an item if you were forced to sell it below cost to clear it out.
Risk of an item not selling
You may have decided to keep excess inventory but then realized you misjudged what will and 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 below cost to move the inventory out of your warehouse.
Higher storage costs
Excess inventory means extra space needed for storage. Additional 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 have extra maintenance costs and risk needing more 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. However, having less of it in excess would incur more minor losses should these natural disasters happen.
Higher insurance premiums
The insurance you will pay for items will be directly related to the capital cost of the products you store. The more inventory you keep and the longer you keep it, the more insurance you pay. It’s really that simple!
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 stockouts 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.
As mentioned, in many cases, 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 reserve in the back. Empty shelves are never a good look for a retailer, so it’s best to keep them filled whenever possible. You can do this by planning your safety stock levels to account for unexpected fluctuations in your inventory levels.
One way to help ensure that you always have a good balance of inventory is to use software designed to manage your warehouse. 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. If you’re using barcodes, inFlow can handle that too! Read our Ultimate Barcoding Guide to learn everything about barcodes, including how to start barcoding your business.