Inventory, or stock, is the most critical asset of a manufacturing organization that directly affects efficiency and profitability. Thus, many retail and F&B businesses require some assistance to maintain the proper inventory level, without which you either end up with expensive excess merchandise (overstocking) or lose out on sales due to understocking.
A refined approach to replenishment planning and sales data can be used to estimate how much inventory to keep on hand. Your productivity and profitability will only improve if you make these well-informed decisions.
What is Overstocking?
Overstocking, sometimes known as “surplus stock,” occurs when retailers buy more goods than they can sell.
Retailers who order too many goods end up with a surplus product left on the shelves or in the warehouse, reducing their profitability and locking up their working capital.
What are the Risks of Overstocking?
Increased Cost of Storage
One of the most obvious drawbacks of overstocking is the cost of storing excess inventory. Not only do warehousing expenses comprise the cost of renting a warehouse or storage facility, but they also include the cost of manpower to oversee your warehousing operations.
Additionally, the extra merchandise is costing you space as well. Not only do you have to spend money stocking the surplus inventory, but you also lose money by giving up precious storage space that could be utilized to keep more profitable items.
Less Working Capital
If you spend money on inventory, you will only get your money back if you sell the item. That basically means that when you overstock, your money is locked up in extra inventory. As a result, you have less operating capital to manage your firm, which could cause problems that worsen over time.
First, you will need more money to replenish a product that is doing well, which will cost you sales. Additionally, you won’t be able to launch new goods that might benefit your company, resulting in missed opportunities. This particularly harms small firms since it is difficult to recover because they typically have low-profit margins and high debt loads.
Loss of Products
Since many products have an expiration date, not being able to sell them for an extended time may result in inventory loss and, ultimately, financial loss. There is a big chance of locking up resources in dead goods if you overstock. The danger of expiration or obsolescence is higher for perishable and time-sensitive commodities, which fall into this category.
Reasons that Lead to Overstocking
- Lack of current, accurate inventory data
- Lack of standard planning processes for material requirements
- Organizational practices for inventory classification and control are not adhered to
- Poor or insufficient production planning
- Incorrect revenue projections
- Poor Supplier Relationships
How to Prevent Overstocking
Invest in Replenishment Planning Software
Replenishment planning software that can perform data tracking, analysis, and calculations for you is a valuable addition for many retail shops.
Nearly 43% of small enterprises either track their inventories manually or not at all. To avoid overstocking, there are reasonable software choices that can assist you in better understanding what, when, and how much product you need.
Consider the KPIs and indicators you wish to start tracking when comparing inventory management solutions. To have a scalable solution for your organization, be sure the platform you choose is in line with your objectives.
Track sales with a POS system
Think about the point-of-sale (POS) system you’re utilizing and whether it’s collecting the data that will be most helpful to you in making purchases.
Quick, easily accessible information, including sales types, customer profiles, product categories, remaining quantities, and even product reorder point alerts, should be made possible by POS data solutions.
POS systems provide sophisticated replenishment planning and sales tracking reports that take the guesswork out of buying and simplify refilling your shelves with goods.
Accurate Demand Planning & Forecasting
Companies can correctly estimate demand using orders or historical data and create production plans with the help of replenishment planning software. This will allow you to map your inventory needs and make purchases based on those needs, whether you wish to order a few items in modest quantities during the off-season or buy more items in bulk to meet peak demand.
Automated Procurement Practices
When the inventory planning tool has accurate knowledge about production schedules and material requirements, it can place automated reorders for goods that are out of stock. Automated procurement makes the following possible:
- Demands from several places and departments might be combined.
- Bulk orders with varying delivery dates are possible.
- For on-time deliveries, logistics might be planned far in advance.
- You can locate nearby vendors who can supply high-quality materials.
- Strong supplier relationships can help ensure optimal inventory because they will offer the best prices and timely deliveries.
Audit Your Inventory Regularly
And lastly, perform routine inventory audits. Knowing how you stack up against your key performance indicators, or KPIs, is essential for a successful audit. So setting goals for your inventory management is the first step.
The following information could be most helpful in generating KPIs for purchase management:
- Cycle Time: The time between product creation and selling
- Inventory Turnover Rate: How rapidly you are restocking and selling your inventory
- Inventory Count: The total inventory value (divided into ABC groupings)
- Order Fulfillment Time: Length of time between the fulfillment of an order and its sale or delivery.
These KPIs give you a complete picture of your inventory, the products that are profitable for your company, and those that aren’t.
This will enable you to identify the items that need replenishing regularly and those parts of your inventory structure that are causing an overstocking problem.
About the Company
Fountain9 assists companies in stocking inventories to the optimal level through their replenishment planning software, Kronoscope. It tracks the inventory in real time and automatically places purchase orders when the reorder point is reached. It also accurately forecasts demand, allowing businesses to know how much stock to reorder in the coming period.
Kronoscope also prevents overstocking by proactively identifying SKUs that are at risk of getting piled up at various levels in the supply chain. It can identify SKUs ideal for liquidation by proactively monitoring SKUs that are piling up (getting overstocked) at any level in the supply chain, helping to avoid wasted procurement and replenishment time, unnecessary expenses, and opportunity costs.