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Overstocking Woes- Definition, Consequences & Tips To Avoid

Do you keep a regular check on your inventory? If yes, then how often do you do it? If you look closely, the answers to these questions determine your sales significantly. 

Everyone in the retail industry likes to prepare for the worst – with contingency measures that protect them from various uncertainties in retailing. Sometimes, procuring an extra quantity of the product seems safe enough, so the person doesn’t lose sales. But it doesn’t always mean that they are doing the right thing. 

To simplify things, we’ll let you picture a scenario where you had to source wholesale products from a supplier and you got more quantity than required, thinking you will steer ahead of time. This is where things go south; that inventory lies unsold at your store while making it difficult for you to disperse it by each day’s end. 

A very generic term for this situation is known as overstocking. It is anticipated that retailers may lose $123.4 billion annually due to overstocks, while another $129.5 billion is lost due to out-of-stocks.

To avoid overstocking, your must plan out strategies while keeping some tips in mind. 

Why does overstocking occur?

Fortunately, almost all of the reasons for overstocking may be prevented by more thought-out calculation, planning, and analysis of your inventory. Overstocking is typically caused by these factors mentioned below –

Wrongly estimated demand

When it comes to gauging demand, it becomes a challenge for many retailers. It is due to the information gap that they experience in consumer behaviour which is highly volatile. 

Many times the retailers are kept in the dark about who their customer is and if they have any recurring customers. This leads to managing their inventories blindly on their assumptions. 

If you’re a business owner and you can’t distinguish between new and returning consumers and their purchases, the relevant data for stocking is lacking.

Not knowing requisite demand might result in expensive excess stock that remains on your shelves, eating up space that could be used for new goods and sales prospects.

Fearing out of stock

Out-of-stock scenarios are dreaded for good cause. Every year, they cost shops around the world almost $1 trillion.  

Stockouts and low inventory levels caused by shortages have a cumulative effect on shops. In addition to the cash that is lost, there are long-term consequences like as angry consumers, damage to the brand’s reputation, and expensive replacement items that must be rushed.

Ineffective Marketing Promotion

Marketing is necessary for attracting customers and putting your firm on an edge over your competitors. However, problems can arise when business owners depend too heavily on marketing to sell their goods.

Don’t assume that simply because you have a successful marketing effort, your consumers will desire to purchase the vast amount of things you purchase from your vendors. This is the way merchants could unluckily end up with surplus stock.

 Negligence in managing inventory

Running a physical retail store successfully requires concentrating on inventory and things that are currently in stock.

Don’t forget to include inventory expenses when counting overstocking as an issue. Unfortunately, another reason for the excess stock is a lack of understanding of these crucial areas of inventory management. These are – purchase costs, shortfall costs, and carrying costs

The costs associated with retaining or storing your wholesale products are known as carrying costs. The break-even point is affected by a number of factors, including labour costs, break-even points, opportunity costs, warehousing or storage costs, and loss from depreciation over time.

You can’t purchase new inventory if you don’t have correct information about your profit margins and the cost of goods sold. To start efficient inventory management and prevent overstocking, you must get detailed insights.

Supply chain problems

Disruptions to the supply chain are currently all prevalent. Supply chains throughout the world were impacted by the worldwide epidemic, which had an effect on producers, suppliers, retailers, and customers alike.

Retail stores may be tempted to make an expensive overstock as a backup plan for supply chain irregularities. Additionally, it might be difficult to maintain on-shelf availability, therefore it’s critical to have access to data tools that can help you analyse your POS data.

These data should assist your in-store staff in making choices to prevent overstocking and help you adjust for supply chain delays.

Consequences of overstocking

Whatever the reason, having too much inventory on hand can result in critical issues for your retail business.

After all, you are losing both productivity and revenue if your retail store’s excess inventory is consuming valuable time and resources.

Heightened Storage expenses

The expense of storage and available space is the most noticeable and immediate effect of having excess inventory on hand.

Overstock prohibits the placement of goods that could sell by occupying shelves or stockroom space in the back of the store. As the need to speed the sale of surplus items frequently necessitates additional time and work, deeper discounts, and more expense, this is a lost opportunity cost that can be difficult to recuperate.

Tied-Up Finances

Additionally, there is money invested in buying overstocked items. And that investment won’t be recouped until goods sell.

As a result, store owners are unable to replace surplus merchandise with new products, which delays the introduction of potentially lucrative new products.

Product Expiration 

Finally, overstocking puts a product in danger of going bad and becoming obsolete in the case of perishable and time-sensitive items.

The window of opportunity to sell the excess inventory like wholesale food in this situation is small, and time is of the essence. Because they need to free up resources, this puts even more pressure on merchants to sell their goods below the margin.

However, these are only the most visible consequences of overstocking.

The downstream effect includes more labour and employee compensation, time spent moving products, increased shipping or delivery costs, and a reduction in your profit margin.

Deal With Overstocking The Smart Way

The key to preventing overstocks and stockouts is inventory control. Placing orders without knowing your store’s inventory is the main cause of all overstocking.

Consider using these five suggestions to lower your risk of overstocking and improve your stocking procedures.

Use a POS system to monitor sales

Think about the point-of-sale (POS) system you’re utilising and if it’s collecting the data that will be most helpful to you in making purchases.

Quick, easily available information including sales types, customer profiles, product categories, remaining quantities, and even product reorder point notifications, should be made possible by POS data solutions.

POS systems like Shopify POS provide sophisticated inventory management and sales monitoring data that take the guesswork out of buying and make it simpler for you to refill your shelves with goods.

 Apply the ABC method

Retailers can arrange inventory based on importance by utilising ABC (Always Better Control) analysis. The 80/20 rule, which states that 20% of your items account for 80% of your income, is the foundation of ABC analysis.

A = stands for items of the greatest priority. The best-selling and most profitable merchandise for your shop is this stuff. They are the main focus of your sales and replenishment efforts and have the most impact on your inventory cycle counts.

B = Things with modest importance. They regularly have strong sales and receive regular, less frequent orders.

C = Lowest priority items that are frequently kept in large quantities to prevent frequent restocking

Store owners may optimise storage space and expedite operations with this kind of hierarchical categorization, putting the emphasis on the Category A products that will bring in the most money. 

Keep a check on your inventory

And lastly, perform routine inventory audits. Knowing how you perform in relation to your key performance indicators, or KPIs is essential for a successful audit. So setting goals for your inventory management is the first step.

The following information might be most useful in generating KPIs for inventory management:

Cycle time: the period of time between the manufacture and sale of a product

Inventory turnover rate: the speed at which you sell and renew your stock

Inventory Carrying Cost: The total cost of unsold inventory is less than 30% of the value of the inventory.

Inventory-to-sales ratio: Amount of Stock Available for Sale / Amount Sold

Over to you

Getting rid of overstocking is a difficult problem with many aspects involved. As a retail operator, you must actively maintain your inventory of wholesale products. This will enable you to determine what needs to be restocked the most frequently as well as which goods, procedures, and other aspects of your inventory structure are causing an overstock problem.

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