A Deep Dive Into Excess Inventory Woes: Causes And Costs9 min read
Table of Contents
What is excess inventory?
Excess inventory is when a business carries more stock than they need to meet its forecasted demand. This is not to be confused with buffer stock, which is typically additional stock carried by the business to make up for any supply chain issues or surges in sales. Excess inventory, on the other hand, is stock that builds up in the inventory unintentionally due to poor sales or demand or poor forecasting and purchasing decisions.
Excess inventory eats into a business’s revenue bit by bit and is a problem that needs to be tackled with a deft hand.
Why is excess inventory such a big problem?
Excess inventory cannot be avoided. Let’s get that out of the way first. That being said, WHY do we end up with excess inventory so often?
Well, in today’s TikTok-led world, consumers have become more fickle than ever, so you can never accurately tell what product will fly off the shelves and what product will collect dust instead. This is especially true for retail segments like fast fashion, food & beverages, and even beauty & skincare. These are also, unsurprisingly, the most polluting retail industries from an environmental standpoint.
Secondly, forecasting errors and supply chain disruptions. It’s becoming increasingly hard to accurately predict demand and stock availability when you take into account geopolitical events like the Ukraine-Russia war and the impact covid has had around the world. The lockdowns that were put in place around the world during the pandemic are continuing to have an effect on supply chains even today. Forecasting demand and supply chain issues can be managed to a large extent if businesses switch to AI-based forecasting solutions that are better equipped to handle and process large quantities of data for pattern recognition.
Clearly, excess inventory is born because there are way too many factors to be considered and businesses would rather err on the side of having excess inventory than not having enough inventory to meet demands and lose out on sales.
But excess inventory is a costly affair. The excess inventory costs eat into margins quite a lot, not just in terms of actual product cost but also the manpower employed to maintain and then sell or destroy them. Not to mention the amount of time it would take for it to go from warehouse to contract as well as the redundant back-and-forth communication.
Excess inventory costs that retailers deal with
Excess inventory tends to have a varied number of costs associated with it. From managing the space to trying to sell devaluing inventory at huge discounts, businesses need to plan their excess inventory properly or potentially end up losing more money than just the stock value. Recently, environmental costs have also been paid a lot of attention to.
Working Capital & Accrued Interests
Unarguably, cash flow is extremely important for every business. Excess inventory ties up working capital, i.e., money that can be spent to pay employees or buy potentially moving stock is instead spent on goods that are sitting idly in the inventory. Add to this the accumulating interest on working capital and opportunity cost, i.e., the difference in choosing to spend on this stock versus other business spends, which can add up very fast. For example, if most of your cash is tied up in inventory, you lose the opportunity to invest in other areas of the business, such as marketing or newer inventory.
Storage Costs
This includes a combination of the rent on the warehouse itself (or mortgages), and maintenance costs (lighting, heating, or air conditioning). The more amount of space used to hold excess inventory, the less space you have to buy and store newer inventory or products that are actually fast-moving. If you look at this from a CPG industry point of view, it becomes all the more worrying because these products have an expiration date. There’s always the possibility that businesses pay a lot of money to maintain these products at optimum condition but are still forced to destroy them once they hit expiration. During sales like Black Friday, this cost compounds because businesses rent out additional spaces to hold more inventory.
Service Cost
These costs typically include insurance, security, IT hardware, software, and the cost of manpower required to maintain these goods. Additional warehouse spaces mean increased personnel costs as well. If the inventory gets damaged, stolen, or lost, the businesses must bear that cost as well as the cost of replacing that inventory.
Stock Devaluation
Any product left in the inventory for too long loses its value. It’s in the business’ best interest to sell them off as soon as possible to recover margins. For industries like CPG, this becomes paramount because expired products must be destroyed and cannot be sold at cheaper prices like with fashion. The other side of this story is that for fashion and beauty, trends change at a rapid pace that businesses can’t keep up with, so it’s important that they offload excess inventory to other marketplaces and big retailers as soon as possible to avoid significant losses.
Inefficient Transportation
Transportation costs tend to add up over time. While transporting excess goods from one warehouse to another, the amount of fuel needed to transport, either over the road or by sea, or by air can become very expensive. For example, businesses still struggle to maximize truck capacity when transporting goods. They might plan for a trip from Michigan to Colorado which requires a lot of fuel but carry only half the truckload capacity. The lack of transportation optimization can lead to greater fuel use and more harmful greenhouse gas emissions.
Environmental Waste
The worst-case scenario for every business out there is to get rid of the stock by destroying or discarding them. This is especially true for CPG and grocery businesses whose products have a shorter shelf life. Recently, fashion brands have been under fire because many brands choose to dump their excess inventory into landfills or burn them so as to not dilute their brand quality. Either way, unsold excess inventory incurs an additional cost to the company as the products are being destroyed (& are causing harm to the environment) and also need to be replaced.
Challenges with selling excess inventory
If the costs associated with excess inventory are on one side of the equation, selling them once they are deemed “excess inventory” is on the other side of the equation. A very hard equation. The process is quite long and difficult.
So what does excess inventory management look like today?
Businesses usually employ teams of people who go through all the data from multiple sources and compile it into one or more spreadsheets (the most common format). They then go through the data manually and identify how much excess product is left, categories, and time left before expiry (for CPG) and take a lot of time in filling out any discrepancies in the data. Multiple people working on the same sheets means a lot of back-and-forth communication, human error, and inaccuracies in the sheet.
Post this they have to go through a tedious negotiation process that can involve manually tracking and adjusting product quantities, pricing information, attaching images, and more across spreadsheets, emails, and phone calls. Not to mention having to track multiple offers from buyers and identify which makes the most sense from a margins point of view. Reviewing competing offers requires hours of sifting through spreadsheets and emails just to understand how much inventory each potential buyer is willing to take and at what price point, and it’s not always immediately obvious which offers are better than others. As a result, brands miss out on key opportunities to maximize their margin recovery or increase the volume of inventory sold. The risk of over-selling is also high, considering the volume involved which can negatively impact the trust a buyer might have in them/the business.
From the buyer’s side, this process of evaluating offers can be labor-intensive and cumbersome, involving multiple emails and phone calls.
So, how do we make this easier?
Not using spreadsheets and emails, that’s for sure. Alternatively, you can use a solution that would automate all of the steps mentioned above into a single dashboard. Imagine a solution that
1 – is capable of automatically organizing all your excess inventory from the spreadsheets you upload
2 – would help you create individualized offers easily – assigning products & units with specific price points for each, setting negotiation conditions including truckloads
3 – will help you compare wholesale, retail and offer prices easily for each product enabling you to get the highest margins
4 – makes life easier for both you and your buyers by providing a single space for you to negotiate and chat regarding every single product in the offer
5 – automatically remove products in allocated and accepted offers from the overall inventory to avoid over-selling.
This is what Vue.ai’s excess inventory management solution, INTURN does. No more back-and-forth phone calls or emails filled with filtered spreadsheets. Just a single dashboard. As a leader in supply chain visibility, Vue.ai offers solutions that empower teams to proactively optimize existing overstock to maximize recovery.
We’ve partnered with leading brands across industries worldwide, each with its own set of unique challenges to solve. Get in touch to learn how our solution can help you optimize your inventory.
Alternatively, if you would like to read more about the solution, you can head over to part 2 of this blog series!
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