Excess Inventory
Excess inventory, further mitigated by efficient purchasing software, emerges when there is an abundance of unsold products that surpass the anticipated consumer demand for a specific period. Such situations can result from mishandling stock or making unfavorable decisions concerning available inventory. Often, an excess of inventory leads to the immobilization of excessive capital within these assets, subsequently constraining the financial agility of the company.
There are many reasons that excess inventory can occur. That includes inaccurate sales projections for the company, significant and sometimes sudden shifts in economic conditions, over-buying of product, cancelled orders of product, and unpredictable consumer demand. Short-term incidents may be due to changing weather conditions or unforeseen changes in operations. In other cases, it can occur as a result of late or early delivery of products to the company.
Advantages and Disadvantages of Excess Inventory
Advantages of Excess Inventory
- Buffer for High-Demand Periods: Excess inventory acts as a safety net during sudden spikes in demand, ensuring that businesses can meet customer needs without delays.
- Prevention of Stock-Outs: Maintaining surplus stock minimizes the risk of running out of products, which can lead to lost sales and dissatisfied customers.
- Bulk Purchase Savings: Purchasing in larger quantities may reduce costs per unit due to supplier discounts or economies of scale.
- Supply Chain Disruptions: Excess inventory can protect against delays or disruptions in the supply chain, ensuring consistent availability of products.
Disadvantages of Excess Inventory
- Increased Storage Costs: Surplus stock requires additional space, leading to higher storage and warehousing expenses.
- Reduced Cash Flow: Tying up capital in excess inventory can limit the cash available for other operational or strategic investments.
- Risk of Obsolescence: Over time, products may become outdated or perishable goods may expire, leading to financial losses.
- Operational Inefficiency: Managing and tracking large volumes of inventory can strain resources and complicate logistics operations.
Understanding Why Excess Inventory Occurs
Excessive stock may occur for various reasons and when it does it can create disruptions in management of product. There are generally three key ways this impacts the product cycle. The first is due to shipment delays due to processing times, international regulations on the product, and order frequency.
Technical challenges may also occur. This could be the result of purchase order decisions, EDI processing, system integration, or poor visibility into the operations and needs of a company. The remaining reasons often include factors such as returns and quality concerns with product.
Most companies face some inventory management limitations when it comes to moving consumer goods. In some situations, retailers may not sell product they have or seasonal trends may impact the changes in inventory. In some situations, it can be difficult to predict inventory needs especially with fast moving consumer goods. This can lead to disruptions in the product cycle and impact costs overall.
Why Is Too Much Not a Good Thing?
Inventory management is critical to the financial management of an organization. Too much inventory will tie up cash flow, meaning there is less money available for the company to meet its financial obligations on an ongoing basis. To free up capital and cash flow, companies may need to reduce the amount of product that it is holding.
In addition to this, excessive inventory management is critical to revenue. The longer merchandise remains sitting in stock, the lower the demand for it is. Over time, that stock may not be worth as much as it was prior. This may mean lower profits over time if the company cannot liquidate that stock fast enough. Clearing away stock makes room for higher profit margin items to be held on those shelves that could be a better financial investment for the company.
What Is Inventory Turnover?
One component of excessive inventory is inventory turnover. This measures how fast the business is able to sell inventory. It compares the speed of selling inventory to the industry averages based. When there is a low inventory turnover present, that indicates that there are poor sales. This could lead to excess inventory. In situations where there is high turnover, that indicates that the sales are higher of the product and demand is good. That could be due to significant discounts or sales of the product.
Wasted Resources
Another component of excess inventory is wasted resources. When demand for a product flows, that means that the company cannot sell it. This leads to a waste of all of the resources that the manufacturer put into making that product. In some situations, this can be even more concerning, such as when product is wasted due to damage to it or expiration of it. In these situations, the product cannot be resold in any way and must be disposed of instead. When that disposal occurs, it indicates that there is a waste of cash in numerous areas including in the money spent on resources, energy used to create that product, as well as in the cost to dispose of it. This adds up and can be very costly to an organization.
Working to Improve Inventory Control
In nearly all businesses that deal with product, it is critical to implement methods to monitor inventory use. Doing so may help organizations to free up cash that is tied up within inventory that cannot be used or is no longer beneficial to maintain. This may also impact the supply chain as the need for new product may be limited if the old product is not removed.
Excess inventory management is often done using technology. This type of technology enables organizations to have more accurate data about how their products are selling and how much they need to keep on hand to meet needs but also to limit the over-purchased or overproduction of products. Selling off excess inventory as demand changes is a common way of alleviating some of the burden for companies.
