Excess stock is a term used in inventory management, and is often called the number of different things, Overstock, stock surplus, excessive stock, or excess inventory. It does not matter what you call it, one thing that remains constant is the risk of additional stock to your company’s bottom line.
Companies that hold additional stock levels in their inventories generally know that the issue was due to poor forecasting and poor management of replenishment or not tracking the life cycle properly stages of a product.
Excessive stock levels come with many different costs that organizations should be concerned about. First, the revenue associated with inventory products is lost with the market’s low demand. There are company dollars tied up in capital that are directly related to the original purchase of goods and sometimes associated costs to store inventory referred to as “carrying costs”.
Carrying costs quickly add up to many different factors, including rent or mortgage payments, equipment costs, labor costs, utilities, insurance, and interest that are on the stock. not been sold.
The excess stock is best classified as a decreasing phase of the product life cycle, shown in the graph below. There is usually a demand for the product, but it begins to be phased out and organizations that do not actively monitor the stages of demand for all their individually stocked items, due to poor reorder or replenishment Additional stocks run the risk of getting stuck with large amounts of stock. Practices.
If not managed properly, a company can expect to sell most of its excess stock to break even on its investment or lose only a small percentage of the profit. This is the best case. Excess stock that is usually not liquidated into obsolete stock, which almost always leads to a large and painful expense on the books.
Advantages of Excess Stock
In addition to the financial burden of carrying additional stock levels, there are some advantages to always having inventory available. Below are three reasons that additional inventory may be beneficial to your operations.
Higher Service Rates (Order Fill Rates)
Always sell always inventory when that opportunity means having inventory on hand However, having a 100% fill rate is not always the best thing when you are trying to effectively manage your costs associated with your inventory. Smart inventory planners know they need to balance having low levels of inventory while also meeting a desired service delivery rate as close to 100% as possible. At Rack 37, we call the process of attaining low inventory levels while maintaining a high service delivery level “inventory optimization.”
Higher Safety Stock Levels (Buffer Stock)
High safety stock levels when the sale is always inventory available. This will help you avoid reducing the lead-time for delivery, stock out and keep your customers happy. In contrast, additional stock level increases, it makes financial pressure on your risk, as well as your business. Companies that leverage an inventory optimization software like Rack37 can more accurately calculate safety stock to ensure unnecessary replenishment is avoided. Watch a demo to see how it completes.
Bulk Purchase Order Savings
Most see savings when buying small business bulk supply, because most suppliers offer their customers discounts that order in large quantities. Businesses can save on shipping costs for a large order rather than adding shipping from multiple small batch orders and handling costs. There is market uncertainty of demand for that product, with risk for large batch orders. On the flipside, companies that can intelligently estimate their demand and estimate accordingly, while strategically optimizing their replenishment processes to obtain customized pricing from suppliers. Do not burden yourself with the order of the elder.
Disadvantages of Excess Stock
Although there are a few operational advantages of carrying excess inventory, there are several financial reasons why you should not. To hold down the top three are the reason that healthy you inventory levels need to constantly monitor their stock levels against its product life cycle.
High Carrying Cost & Opportunity Costs
If your company has a high level of holds inventory, so it is relevant to business funds, which the company can use in research and development or marketing such other areas. The new product can bring development and marketing of additional business for the company, but do not keep high inventory levels.
Unless the company is not taken back by selling or cost Organization of inventory then uses it to create customer orders, inventory. Slow is the opportunity cost of carrying large amounts of rotating products. These products have a place in your warehouse when you can hold the products grow faster than its high demand. If you struggle with balancing the warehouse space allocation, you may want to do some research into best practices ABC classification.
Increased Storage Costs
Inventory storage and cost of additional stock in a business. Warehouse space costs of warehousing, utilities and may include maintenance of the storage area. Some supplies may need additional maintenance, such as temperature control to maintain the quality of content. Companies in the business to reduce inventory levels can store the contents in a small area and can use the extra space for new product development. Some companies can reduce inventory levels down by up to 30% by simply improving their forecasting methods and replenishment practices.
Quality Reduction & Product Degradation
In addition to stock quality from the store may cause problems such as degradation and potential obsolescence. Companies have long can stock the stock higher in anticipation of demand recurring order with permanent customer, however, the customer can change the specifications or may require other materials for future products over time. In this case, the company should opt for new materials and supplies to build the new customer specifications, which leaves extra or any case in large quantities obsolete inventory.
Whether you recognize easily quality problems with the purchase of small quantities or can differ. For example, in Rack37, reorder points and replenishment parameters are automatically set per each inventory SKU, which reduces a company’s risk of ordering too much stock. At the top of the list control techniques with our White Paper even further reductions in its catalogue. Download your free copy here!