Is your business hiding some extra weight in the back of your warehouse where nobody goes?
When your inventory is so overweight getting back on track can seem like an impossible task. However, with the right approach and use of technology, it’s simple to make a business lifestyle change that will naturally result in a healthier inventory.
Excess inventory – a definition
Excess inventory is when stock levels for an item exceed its forecasted demand in an uncontrolled manner. Carrying excess inventory is inefficient and has several financial implications. These include tying up much-needed capital, increased carrying costs, and risk of stock obsolescence.
What are the causes of excess inventory?
- Inadequate forecasting methods
Inaccurate demand forecasts often lead to carrying too little or too much stock. Poor inventory forecasting is usually due to not having the right inventory management software for the job, for example, you lack adequate demand forecasting software or are trying to use spreadsheets for complicated calculations.
- Ignoring seasonality
Producing forecasts that ignore seasonal demand variations is another key reason for the build-up of excess inventory. If you fail to identify items that are affected by seasonal demand, your forecasts for these items will never be accurate, using the right technology will assist in identifying these trends.
- Product lifecycle
All products go through a life cycle, from market introduction, through growth, maturity, and decline. At each stage, a product’s demand will change. Many inventory planners fail to recognise or take account of the product life cycle in their forecasting. This is particularly risky as products enter decline and demand drops off. If forecasts and reordering parameters aren’t adjusted to mirror the falling sales, businesses can be left with excess stock which can quickly become obsolete if demand disappears altogether.
- Purchasing decisions
It’s easy to get carried away in supplier negotiations and focus on getting the best price for every order. One way to do this is through bulk buying. Sometimes the lure of an excellent cost-per-unit price is too much to resist and before you know it, your warehouse is full of items you ‘bought for a bargain’, without there necessarily being a demand for them.
- Complex supply chains
Businesses with multi-layered or multi-site supply chains often find they carry too much surplus stock. This is often due to decentralised inventory purchasing, where at each stage of the supply chain a little extra stock is added to an order to cover any inaccuracies in demand forecasting or delays in supply. The result is a surplus in stock at each layer of the supply chain which in isolation may be small but added together amounts to substantial excess inventory.