What is Excess Inventory?
Excess inventory occurs when a product exceeds the projected consumer demand, and as a result remains unsold. From over-purchasing, to rising tariffs, to canceled orders, to poor demand forecasting – there are a number of factors that lead to businesses ending up with too much inventory on hand.
Most recently, we have seen COVID-19 drive temporary store closures, delays in shipping, and manufacturing shut-downs, resulting in an excess inventory problem for many brands. As well as being potentially damaging to the environment if disposed or destroyed, excess inventory can severely restrict a company’s cash flow and have a major impact on the bottom line. We discuss the financial and environmental impact of having too much inventory on hand below.
The Financial Risk of Excess Inventory
Excess inventory exists across industries—from fashion & apparel, fast moving consumer goods (FMCG) and home goods, to car manufacturing and the electronics industry, to name a few. While there are some advantages to holding onto excess inventory (for example, extra inventory can allow for a buffer when there is unexpectedly higher customer demand or when there are issues with shipping), the disadvantages generally outweigh the advantages.
In the past, the accumulation of excess inventory played a role in toppling some of the largest companies in the United States. In the 1990s, when Walmart and Kmart were engaged in a price war, Walmart moved over to a just-in-time approach, which was the more efficient supply chain management strategy at the time. Kmart continued with their less-streamlined approach using but found themselves unable to align their inventory levels with customer demand due to a reliance on error-prone processes and technology. Forecasting would be incorrect, shipments would be delayed and the result was a mounting level of excess inventory. Consequently, Walmart’s stock prices rose while Kmart’s stock significantly dropped, leading Kmart to file for bankruptcy.
Therefore, a significant issue of excess inventory is its impact on a business’s profitability. Inventory is purchased to be resold at a profit, and having too much inventory on hand can result in working capital being tied up as goods. Inventory loses value over time as degradation occurs and demand diminishes, leading to an eventual loss of revenue. Additionally, if capital is tied up in inventory, then that means that it is prevented from being used elsewhere within the business, further slowing down potential growth.
More than ever, implementing effective inventory management is a crucial aspect of any business trying to tackle excess inventory. Recent economic instability has caused volatility in product demand, which has allowed excess inventory to remain a prevalent financial risk. Consumer packaged goods (CPG) leaders have been attempting to tackle this issue by focusing on improving their forecasting – despite this, excess inventory continues to affect the bottom line in many industries.
How Excess Leads to Environmental Waste
Excess inventory has a material impact – not only on a company’s bottom line, but also on the environment. An increase in climate change awareness has shone a light on sustainability for retailers as well as their customers.
With two-thirds of consumers admitting to boycotting brands who don’t share their personal beliefs, companies have added incentive to manage the environmental impact of their excess inventory from a reputational standpoint as well as an ethical one. Ultimately, customers are more likely to repeatedly buy from a brand who is actively trying to account for, and limit, their environmental impact. To do this, brands need to identify the environmental risks of their industry’s excess inventory problem.
The Food Industry
Too much inventory on hand has led to overstocked shelves full of perishable food. The waste has contributed to a global crisis.
Globally, 33% of all food produced and 45% of root crops, fruit and vegetables are lost or wasted annually.
The United States is the biggest global contributor to food waste, spending approximately $161 billion on food that will never be eaten, with the average American family of four wasting around $1,500 worth of food every year.
Beyond profitability, excess inventory in the food industry has moral and environmental implications. A quarter of all greenhouse gas emissions come from the food industry, and of this, a third is the result of food waste. When food is wasted, all of the resources that contributed to produce and transport it are also wasted.
However, progress is being made to tackle the impact of food waste. In the UK, the government has issued a warning that there will be major fines if supermarkets do not pledge to halve food waste by 2030. So far, top retailers Tesco, Sainsbury’s, and Waitrose are among 300 businesses to have taken this pledge. While in the U.S., the United States Department of Agriculture (USDA) and the Environment Protection Agency (EPA) announced in 2015 the first ever domestic goal to reduce food loss and waste by 50% by the year 2030. While these are positive steps towards mitigating the impact that food waste has on the environment, globally the issue is still widespread.
The Beauty Industry
Overstocking in the beauty industry has caused an excess of expired products in unrecyclable plastic packaging, causing economic and environmental issues.
The American beauty industry is the largest in the world, worth $80 million a year. Beauty brands work to build a community with their clients focused on ensuring the right products, particularly cult favorites and new launches, are always available for purchase. To satisfy demand, the always available approach leads to high inventory levels in stores, which takes up space and capital.
However, with the fleeting nature of trends and introduction of celebrity and influencer brands through social media has created a saturated beauty market. Not only this, but forced store closures and a decline in footfall due to the COVID-19 pandemic led to a substantial decline in YoY sales, which has put many beauty brands at risk of having excess inventory.
Excess inventory within the beauty industry can be incredibly challenging. Manufacturers are in charge of determining the shelf life for products as part of their responsibility to substantiate product safety, however it is recommended that unopened makeup is discarded after three years. A relatively short shelf life combined with excess inventory, can lead to warehouses full of expired makeup encased in non-biodegradable material. The implication of this is that these products can’t be recycled, therefore reducing the use of plastic, should be a top priority for all beauty brands.
The Fashion Industry
Brand exclusivity and the need for the newest styles, two defining aspects of the fashion industry, are leading causes impacting sustainability in fashion.
In recent years, the fashion retail industry has found itself facing immense pressure to release new merchandise as a result of a higher turnover in fashion cycles. As a result, fashion & apparel brands have found themselves at the forefront of the struggle with excess inventory. This has only been exacerbated by the COVID-19 pandemic with more people choosing to stock up on essential items, leaving the fashion retail industry to face growing levels of unsold inventory.
Unfortunately, large volumes of excess inventory are often left to be discarded in unsustainable ways. In the past, there have been well-known fashion brands who have been called-out for destroying unused clothing, as opposed to recycling them or selling them at a discounted price – Burberry, for example, destroyed $37 million worth of their own products in 2018. Additionally, given the widespread impact of the COVID-19 outbreak, the fear is that brands will need to focus more on survival than on sustainability.
As it stands, there are 13 million tons of recyclable textiles wasted annually. Decomposing clothing and the long supply chain means that the fashion industry is responsible for creating greenhouse gas emissions of 1.2 billion tons per year, making it the second largest global polluter next to oil.
Excess inventory therefore has a massive environmental impact, and it is important for brands to recognize the implications so they can begin to take positive actions. Although excess inventory is potentially very damaging it can be turned into a valuable business asset if managed effectively.
Managing Excess Inventory
Measures can be taken in every industry to reduce the impact of excess inventory – and it starts with adopting the right inventory technology to allow for more effective supply chain management, cutting down on costs and reducing the overall carbon footprint.
With a centralized system of record, brands can gain greater visibility over all of their inventory as well as access historical data on past performance. Utilizing this information, brands can benefit from data-driven insights that lead to more effective go-to-market strategies, enabling them to optimize their excess inventory in a sustainable way.
However, in terms of realizing the true impact of having too much inventory on hand, businesses still have a long way to go. Brands need to recognize the implications of their excess inventory and start adopting solutions that can help them to manage it successfully and ultimately mitigate the impact it continues to have on their bottom line and the environment.
Effectively managing excess inventory relies on having a responsive, digital supply chain in place. INTURN is the only enterprise software solution that streamlines your workflows and optimizes your margins, all while protecting your brand. Get in touch for more information.