Excess Inventory Definition
Excess inventory is a product that has not yet been sold and that exceeds the projected consumer demand for that product.
It usually represents some type of mismanagement of stock demand due to factors such as over-buying, inaccurate projections, cancelled orders, a bad economy, unforeseen weather changes, unpredictable consumer demand or late or early delivery of goods.
Why Does Excess Inventory Exist?
Excess inventory can be the result of a number of disruptions in the product cycle. These factors can be broken down into three categories:
60% Shipment delays – Delays due to factors like processing times, order frequency and international regulations.
25% Technical challenges – Issues caused by system integration, purchase orders, EDI processing and lack of visibility into business.
15% Other factors – For example returns or quality requirements.
Consumer behavior and market trends can also play a significant role in creating excess inventory. In the retail and home goods industries, excess inventory can occur as soon as the seasonal trends change.
In industries that deal with fast moving consumer goods where demand is hard to predict, excess inventory is often caused by a miscalculation in customer demand, leading to companies over-stocking in slower-moving items.
What Are the Disadvantages of Excess Inventory?
Excess inventory presents a number of issues relating to waste, storage and additional costs. However, the two main disadvantages of excess inventory are:
1. Excess inventory ties up cash flow.
A company acquires inventory for the purpose of reselling the merchandise at a profit turning that inventory into cash that can be used to pay the day to day expenses of the company. Excess inventory decreases this cash flow by holding the cash in goods form and preventing it from being put to use elsewhere.
2. Excess inventory represents a loss of revenue.
Excess merchandise loses value the longer it is held in stock, as the demand for that product diminishes, and it takes “shelf space” away from a newer product with perhaps a higher profit margin. Additionally, holding costs for excess inventory such as warehousing, insurance, and taxes, further diminish profits. Having excess products with an expiration date represents an even bigger loss as these items are no longer viable once the date has passed and will have to be disposed of entirely – without any return on investment.
Excess Inventory and Inventory Turnover
Inventory turnover measures how quickly a business is selling inventory and how this compares against industry averages. A low turnover suggests poor sales and therefore excess inventory, whilst a higher turnover indicates strong sales, big discounts, or indeed both.
Working out your inventory turnover is a good way of establishing what items are reducing your cash flow and unnecessarily costing your business.
Excess Inventory and Wasted Resources
When a product sits idly on a shelf or in a warehouse, it represents a waste of all the resources that went into making it. More so, when excess inventory cannot be sold due to factors such as expiration or damage, it has to be disposed of. The disposal of excess inventory not only represents a waste of all the money and energy that went into production, but is also often incredibly damaging to the environment.
Is Excess Inventory Good or Bad?
Not only does excess inventory restrict cash flow, but it also loses the company money each day. When hundreds of thousands of dollars are tied up in inventory, it’s a big deal for a company and can tremendously impair the business’s growth. Needless to say, excess inventory can heavily restrict a business, and is therefore typically a negative.
Excess Inventory Management
Effective excess inventory management is achieved by having the right technology in place. With a centralized system of record enabling inventory information to be viewed, accessed and updated from anywhere, brands gain improved visibility and control over their inventory. Leveraging both current and historical data on inventory performance will also yield better inventory management results by providing insights that inform more effective management decisions.
How Do I Sell Excess Inventory?
This is where off-price can help. To help gain back money that would otherwise be tied up in stock or spent on holding costs, items can be sold off-price. Due to the number of factors impacting a supply chain, excess inventory is an inevitable part of most industries, but by optimizing inventory through selling excess products on to off-price retailers, brands can recover revenue that would otherwise be lost, thereby helping them to hit their margins.