Every day, in every media outlet, you’ll see articles discussing retail companies with overstock inventory. Even large brands are still working to balance their inventory levels post pandemic, with 66% of owners and executives reporting overstocks.
To solve this problem, brands often fall back on what they do best: drive more sales.
Markdowns, promotions, and clearance sales are the default methods for offloading excess inventory. But these approaches can have a major impact on your margins.
The truth is, profitable scaling starts long before the point of sale. And poor inventory planning could be preventing you from reaching your full sales potential.
To avoid overstocks and free up more capital to invest in activities that drive increased sales, effective inventory management is the best place to start. In this article, we’ll reveal common misconceptions around overstock inventory, plus practical ways to prevent it moving forward.
Overstock inventory, also known as surplus stock, is any inventory a brand purchases or accumulates beyond what it can sell. This excess stock can lead to costly storage fees and reduced working capital that could otherwise be used to generate more sales.
Overstock isn’t the same as safety stock, which is a predefined amount of extra inventory that brands may keep on hand in case of emergencies. Safety stock is carefully calculated as a last resort to avoid stockouts, while overstocking is the result of miscalculations that lead to too much stock.
While overstocking involves purchasing and holding too much inventory, understocking is when you don’t have enough inventory to meet customer demand. Understocking can lead to stockouts, sales losses, and reduced brand loyalty.
Overstocking often occurs as a reaction to losing sales due to understocking. After the pandemic left store shelves empty, many retailers and DTCs turned to overstocking in an effort to avoid losing customers. In the years since, not everyone has been able to adjust their demand planning methods to break the habit of ordering too much inventory.
Many retailers are finding that the textbook “just-in-time” model no longer applies to the new reality of global commerce. For a profitable business model that can weather any storm, you need better tools for tailoring your purchase orders (POs) and moving from “just-in-time” and “just-in-case” to a “just-the-right-amount” model.
Too much stock or not enough? Balance your inventory and maximize your sales with our straightforward guide to calculating your inventory to sales ratio.
Besides over-ordering to avoid stockouts, there are a number other ways business owners and inventory planners may inadvertently cause overstocks.
Here are some of the most common causes of overstock inventory:
To stay profitable and keep sales flowing, brands focus on solving these inventory puzzles, rather than trying to triage overstocks after the fact through discounts and marketing.
Overstock inventory is an expensive problem to have. A 2023 IHL Group study found that overstocking costs retailers $562 billion worldwide.
Here are some of the consequences of overstocking in retail:
Perhaps the biggest consequence of all is that overstock inventory can easily lead to a vicious cycle that consistently drains your profits. Over time, continued poor forecasting keeps you trapped in a loop, always trying to offload excess inventory at a loss.
To prevent future overstocks from eating into your sales and margins, focus on the following six areas, known as the six “rights” of profitable inventory management:
To get these six rights right and avoid overstocking, you need a better plan for managing your inventory — one that includes deep insight into your supply chain and better predictions about future sales. These three steps will help you get there.
Start by determining where you’re at risk of overstocking. Take thorough inventory audits of your stock levels across all storage locations in your supply chain.
If you’re already using an inventory planning solution that integrates with your existing 3PLs and sales channels, you should be able to see your current inventory status in real time. With a clear view of your existing inventory levels and accurate sales history, you’ll have clean data to feed your demand forecasts.
But what if you find that you’re already holding too much inventory?
In this case, there are a few things you can do to get back to healthy stock levels:
If your products still aren’t moving, it may be time to eat the cost through inventory liquidation so you can reduce your carrying costs and invest more capital in your best sellers.
Despite recent advances in AI in inventory planning, many brands are still relying on legacy demand forecasting methods, including enormous, slow-loading Excel spreadsheets that can’t be adjusted in real-time.
To avoid overstocks moving forward, your forecasts need to account for real-time variables like previous stockouts, seasonality, market outliers, and more.
When choosing an inventory planning solution, look for a platform that includes:
With better tools, comes better inventory decisions. Use a system that will help you forecast demand in minutes instead of days, without over-ordering.
When should you replenish? How much should you order? Where should you send it to fulfill planned demand? Your inventory planning process should be fully optimized to answer all of these questions in a glance.
With Flieber, you can:
With your inventory levels optimized, you can focus your time and resources on growing your sales and profits. Not offloading overstock inventory.
When you optimize your inventory, you improve your profits. And the process doesn’t have to be as complicated or time intensive as you might think.
Flieber empowers modern retailers to avoid overstocks and stockouts through customizable forecasts that help you deliver the right amount of product to the right place at the right time.
Sign up for free today to see how Flieber can help you take your inventory level from “just-in-case” to “just right.”