The overstock issue is one of the common problems in storage management. Excess inventory often arises from a lack of planning accuracy and a lack of coordination between the various links in the supply network. However, what impacts will arise from this situation?
In this TransTRACK article, we will examine the concept of overstock, the factors that trigger it, and its impact on inventory.
What Is meant by Overstock?
Over stock occurs when you order more inventory than you can sell. Thus, you will have excessive stock in the warehouse with no chance of selling it in the near future. This situation not only increases your inventory holding costs, but also has the potential to result in expired or obsolete inventory, which can hurt your bottom line.
Overstock vs Understock, What’s the Difference?
In a situation of excess stock (overstocking), you buy too much inventory which in the end the inventory you have cannot be sold. Meanwhile, in a situation of understock or under stock, this is when you buy too little inventory so that the inventory runs out. Both of these scenarios have serious impacts on business.
For example, when you experience a stock shortage, you don’t have enough inventory to fulfill orders from customers. This can cause customers to cancel their orders, even looking for the same product elsewhere. On the other hand, you also run the risk of being seen as unreliable, which has the potential to damage the reputation of the business you are running and is difficult to repair.
What causes overstock?
There are many factors that drive a business or shop to Overstocking. Luckily, most of these triggers can be anticipated through more thorough inventory calculations, planning and evaluation.
Below are the 3 main factors that cause Overstock:
Fear of Running Out of Stock (Fear of Out of Stock)
When stores experience out-of-stocks or inventory is running low due to shortages, the impact is even more significant. Not only is there a loss of potential sales, but there are also long-term costs such as customer dissatisfaction that can damage a brand’s reputation, as well as price hikes for hastily purchased substitutes.
However, keep in mind that retailers must be careful not to move too extreme in the opposite direction.
It turns out that overreaction from running out of stock which turns into Overstock is one of the main causes of excess inventory. Both of these situations have high costs and can be avoided if shop owners adhere to best practices in inventory management.
Misjudgment of customer demand
Many traders face a lack of information about the behavior of their customers, which results in difficulties in planning demand.
Inability to answer questions like “Who are our customers?” and “Are they loyal customers?” meaning many merchants face challenges in maintaining their inventory levels.
As a store owner, if you are unable to separate new and existing customers and their purchasing patterns, then there will be large gaps in your data regarding inventory management.
Misjudging the demand for products from your customers could then result in expensive excess stock piling up on your store shelves, which in turn takes up space that could have been used for new products and sales opportunities.
Poor inventory management
Properly managing stock and availability of goods is the most basic element in running a physical retail business.
Inventory-related costs should also be a primary focus when planning efforts to reduce excess inventory. Unfortunately, the lack of understanding of these important aspects of inventory management is another cause of excess stock.
The three main types of costs associated with inventory include purchasing costs, inventory shortage costs, and holding costs.
Storage costs refer to costs incurred due to the process of storing and managing the inventory you have. This can include employee wages, shipping costs, missed opportunity costs, warehousing or storage costs, and losses due to impairment over time—all of which affect the breakeven point of your operations.
How to deal with Overstock
By gaining an understanding of the number of sales of a particular product or category in the previous period, you can predict future direction. This process can be done on a weekly, monthly, quarterly or annual scale – and it is important to identify the most optimal method for your needs.
Below are tips that you can follow to avoid Overstock:
Manage Inventory Management Properly
By managing inventory levels efficiently, companies can ensure that they have the appropriate amount of inventory whenever needed. This will help them optimize cash flow, reduce storage costs, and improve order fulfillment processes.
In addition, successful inventory management will help companies recognize trends and demand patterns from customers, this information can then be used in making future purchasing decisions and contribute to increased profits.
Offer Special Old Items Discounts and Promotions
When you provide a price reduction or discount, of course this will reduce the profits obtained. However, on the other hand, providing discounts will result in a reduction in the inventory of goods in the warehouse and automatically there will no longer be excess stock in the warehouse.
Apply “Bundling” Products
Currently, companies and online stores are implementing “Bundling” on the products they sell.
This method has proven to be effective if applied to avoid overstock. You can resell items that are less popular if you use this “Bundling” system. With this system you can combine products that are less popular with superior products that are sought after by many customers.
Implement the “Giveaway” System
The final step that can be taken to reduce overstock is by “GiIveaway”.
You can do this method by designing a gift giving campaign by utilizing the social media platform you use, as long as the participating users follow your social media accounts!
In the complexity of inventory management, overstock becomes a challenge that requires the implementation of smart strategies. By understanding the concept of “excess stock”, its consequences, and implementing optimal management strategies, companies can successfully overcome this problem. It’s important to remember that planning proactively, integrating technology, and adopting adaptable practices are key factors in maintaining a healthy balance between supply and demand.
To make deliveries more efficient, companies have the option to use a Fleet Management System to improve overall fleet performance. Better manage vehicle conditions and improve fleet utilization and safety through the FMS provided by TransTRACK!