How much inventory should your company have on hand at any given time? Determining the answer to this question can be difficult, as the amount of inventory can have a large impact on a business’s financial performance. The right amount of excess inventory is unique to each company. Factors like supply chain, demand, and industry can affect inventory management. In most cases, there are both advantages and disadvantages of excess inventory that should be considered during demand forecasting. Through good demand forecasting and strong inventory management, companies can reduce excess and obsolete inventory.
Demand Forecasting and Inventory Management
The first step in determining the right amount of inventory to keep on hand is through ongoing inventory analysis. Businesses should analyze sales and levels of inventory on a regular basis to determine at what rate products are selling. This is called inventory turnover. With this data, companies can conduct more accurate demand forecasting and make strategic manufacturing decisions. Companies may start to recognize broader trends like seasonal popularity or impacts from current events.
Disadvantages of Excess Inventory
- Until excess inventory is sold or gotten rid of in some way, it must be stored safely. To do this, companies must pay for warehouse storage and insurance. This increases the cost associated with manufacturing the product and can lead to raising the price for consumers, potentially to a level that is no longer competitive. Excess inventory also takes up space, meaning there is less space for other types of inventory that are actually selling and therefore more profitable.
- One of the biggest disadvantages of having excess inventory is the loss of liquid capital or cash. The money spent manufacturing and storing this excess inventory is not necessarily lost, but instead tied up until that inventory is sold. This can cause a cash flow problem for businesses, making them more vulnerable.
- Inventory depreciates in value the longer it is in storage. There is also a risk that excess inventory will not be sold at all or will be sold at a discount, resulting in a loss of capital. In many cases, inventory can become obsolete or worthless if not sold immediately. Depending on the type of inventory your company takes, this could be as short as six months for technology.
Advantages of Excess Inventory
- When items are already stocked in your inventory, you can fulfill orders without worrying about delays in shipping. This keeps customers happy and increases overall consumer satisfaction. In today’s fast-paced world, timely shipping can be incredibly impactful for business owners.
Low Risk of Running Out
- In today’s tumultuous world, having excess inventory could be seen as insurance against potential disruptions to operations such as issues with the supply chain or natural disasters. Since these disruptions can affect entire industries, having excess stock could be an advantage over competitors who may not be as prepared.
- Having a high inventory can also help keep shelves perpetually stocked so that they always appear full and bountiful. This can lead to higher customer satisfaction because they have more visual appeal and may lead to more purchases.
How to Reduce Existing Excess Inventory
Apart from improving demand forecasting and inventory management practices, there are a few ways to reduce excess inventory you may already have such as:
- If your excess inventory is due to slower-than-anticipated sales, one tactic for moving product is changing the way it is marketed. Bundling products together is a popular way to sell them.
- An obvious way to sell more products is to offer them at a discounted price. While you may not generate as much revenue as predicted, you can cut costs associated with storing the excess inventory and avoid obsolete inventory.
- If you are looking to quickly get rid of excess inventory, liquidating may be the best option. Many companies will buy large quantities of inventory for a discounted price with the intent to sell it themselves. Often, these companies will pick through inventory and purchase specific items at a negotiated price that may be well below retail value.
Sell to Just Make It Go Away
- Another quick way to offload excess inventory is to sell it to us! Just Make It Go Away is a leading recycler of excess inventory, consumer materials, and manufacturing waste. We work hard to ensure unwanted inventory and materials aren’t in landfills.
Why is Excess Inventory Considered Waste?
Excess inventory is considered waste for a few reasons:
- The first reason is due to the materials and capital used to manufacture it. Until inventory is sold, those materials and capital are being used with no return on investment.
- Holding excess inventory can potentially also point to other waste such as unused or broken manufacturing machines, excessive returns, overproduction of defective parts, and more.
- Carrying excess inventory is considered waste because the longer a product sits unsold, the more overhead it is costing. Therefore the return on investment (ROI) decreases.
How to Reduce Obsolete Inventory
Inventory becomes obsolete at the point when it is clear excess inventory will not be sold. When this happens, it can affect profitability and the overall financial health of a business.
The best way to reduce obsolete inventory is to analyze and track inventory turnover. Companies should develop their own guidelines on what they consider slow-moving inventory in order to flag potential risks. Then, they can analyze the data to make better-informed decisions on production in the future.
Since every business is unique, each business must determine what level of inventory is best for it to have in reserve. Businesses must also ensure they are conducting accurate demand forecasting to make sure inventory does not become obsolete. How is your business managing its inventory?