Updated: Feb 21
You may be tempted to overstock products in order to avoid losing potential sales. After all, overstocking specific products appears to be a simple solution for avoiding an out-of-stock situation and meeting any demand.
However, as you've probably noticed in your growth or bottom line, overstocking causes other issues that can lead to heavy costs and losses in the future. Excess inventory drains capital and expensive storage space, and it can even become obsolete, resulting in an even greater loss.
Just the holding cost of excess inventory can be 25%to 32%. With all the additional opportunity and overhead costs, your profits will shrink.
The accumulating excess can turn obsolete pretty quickly and this dead stock/obsolete inventory has one of the most adverse impacts on the bottom line for any business. Unwanted excess inventory occurs due to inefficiencies in your inventory planning process. A good inventory plan will always balance inventory levels while bringing down costs, this should be the outcome of your supply chain.
It is important for brands to understand their order fulfillment process, from manufacturing to distribution and adopt certain practices to make the entire process more efficient.
These 5 tips will help you identify, prevent and eliminate unwanted excess inventory and bring a balance to your inventory levels.
1. START FORECASTING YOUR DEMAND
This is the starting point for balancing your inventory levels. By gaining visibility into your future demand, you will be able to predict how much demand there will be for a specific product and stock accordingly. You can begin by forecasting demand using historical sales data.
There are many other variables that can influence demand like trends, seasonality variances, supplier lead times, a product's life cycle stage and socio-economic trends. An advanced demand forecasting tool can provide you with an accurate forecast by taking all of these factors into account and providing you with a granular view of demand.
Reordering stock too soon can suffocate your cash flow. You'll end up with a lot of excess inventory way too soon, and the costs will start to add up. To avoid the accumulation of unnecessary excess stock, you must understand when and how much to order. Ordering too early will result in excess inventory, while ordering too late will result in stock outs/lost sales.
Stock Replenishment should not be done purely based on current demand. Current demand can be misleading, especially during volatile market conditions. An accurate demand forecast that takes into account all variables can help you in timing your reorders and placing an order of the appropriate quantity to minimize excess while meeting all demand.
You can also use replenishment tools such as Crest to optimise your replenishment across multiple channels and automate the entire process with just a few clicks.
By taking into account events, promotions, lead times, storage capacity, current inventory levels and many other factors, tools like Crest can replenish proactively to reduce wastage and bring down costs significantly.
3. REDUCE YOUR SUPPLIER LEAD TIMES
In today’s hyper-competitive market, your customers will expect their orders quickly. To fulfill their demand on time, you must take measures to ensure you are well stocked in time.
The longer your supplier's lead time, the more safety stock you'll keep on hand. You're not only delaying your customers' orders, but your costs are also rising gradually. Optimizing your lead times will not only reduce excess inventory but also lead to more satisfied customers and a stronger competitive advantage.
While the pandemic has undoubtedly resulted in longer lead times around the world, you can still take steps to significantly reduce your lead times. Simply starting with accurate demand forecasting and sharing it with your supplier will help your supplier manage their fulfilment process more effectively, resulting in shorter lead times.
Automating your inventory management and replenishment will make it possible for you to anticipate changes in demand or any other disruptions, while allowing you to considerably speed up the ordering process. You will definitely see the impact of this on your lead times, especially during peak demand seasons.
You can also try sourcing more locally, and even providing incentives for early time delivery to your suppliers might go a long way in reducing lead times, and thereby reducing the amount of excess safety stock you hold.
4. ELIMINATE OBSOLETE INVENTORY/ DEAD STOCK
Over time, allowing excess inventory that builds up will become obsolete due to various reasons such as decline in demand, new technology/innovations, more competition, etc. Obsolete inventory will harm long-term viability of a business and also your current financial health. There are costs associated with dead stock that will eat into your profits, and will hinder any growth due to poor cash flow.
Getting rid of obsolete is crucial to maintain healthy cash flow as it lowers overall inventory costs, losses and frees up working capital for the company.
Reducing overall excess inventory through the methods listed above is a necessary preventive measure to avoid the accumulation of dead stock.
It should be noted, however, that even after preventive measures, some excess stock will remain in your supply chain; therefore, it is also important to identify excess before it becomes obsolete and dispose of it.
An Inventory management system which helps track inventory throughout its lifecycle can help you in identifying slow-moving stock that is more likely to become obsolete. With the right metrics, you can make decisions to eliminate dead stock, such as discontinuing specific items, selling them at a discount, or bundling them with other products and running promotions to sell slow moving stock before it becomes obsolete.
5. AUTOMATE YOUR INVENTORY MANAGEMENT
An organized inventory management system that constantly monitors and optimize inventory levels is the backbone of an effective order fulfillment process. A lack of a dynamic inventory management system will lead to out of stocks and unwanted excess inventory.
Inventory management entails constantly tracking inventory levels across all channels, tracking its lifecycle, forecasting demand, calculating safety stock levels, lead times, turnover rates, and much more in order to keep stock levels balanced.
For example, by constantly tracking inventory levels and demand, you can redistribute excess stock at one location to another, where stock is low but demand is high rather than simply ordering additional stock from the supplier.
A slight imbalance can slowly turn into dead stock, missed opportunities and hurt your profits.
Since the scope of inventory management is huge, it also includes a lot of repetitive tasks, which can slow you down and deplete your resources and drive up costs.
Crest inventory management software automates inventory management and optimises inventory levels across all channels, allowing you to meet demand and reduce excess inventory without wasting time and resources manually managing inventory levels.