Excess stock is an obvious problem
You know you’ve got excess stock issues, and so does everyone else in the business. I mean, it’s probably why you’re reading this article right now.
It’s a little like a broken leg. You look down and… something’s not right.
Not only are things out of place. There’s mass where there shouldn’t be. And it hurts.
Both your leg and your warehouse are fundamental to you running every day.
But there’s good news. Because, the first stage, like many things in life, is admitting something’s awry.
If you ignore the pulsating throbbing coming from your leg, you’ll make it worse. And by the time you reach the doctor, the extent of the damage will have been exacerbated.
And it’s the same with your excess stock problem.
Ignore it at your peril.
Firstly, the problem: What is Excess Stock?
Also called overstock or surplus stock, excess stock refers to the portion of inventory in your inventory that is not expected to be sold any time soon.
There are, however, some types of additional stock that we hold for strategic reasons. Backup stocks, safety stocks etc should therefore not be classed as excess stock.
But let’s not lose sight of the bigger problem: Excess stock hurts every corner of your business. Every department and every employee.
But there are some excesses which can be filed under ‘mild annoyance’. A short-term issue and easily solved. There are others which could cost you a lot. Both in immediate performance and future growth.
And each problem offers up a minimum of three ways it can hurt you.
Think of each one as a prize fighter with three special moves. Three different punches to leave you on the canvas.
- Wasted investment.
- Avoidable costs.
- Missed opportunities.
Adding to the complexity of this problem these stocks will be a total loss if that particular surplus stock product becomes obsolete. It further affects both the fast and slow-moving items differently.
- On fast-moving items it causes short-term cash-flow issues
- On longtail items it causes long-term working capital & cost issues
Symptoms of Holding Excess Inventory
Excess stock is a problem lots of businesses struggle with.
Even retail giant Walmart is feels the impact of holding too much stock — In one of their North America locations, inventory has risen 32% through Q2 2022 due to inflation and supply chain issues. Consequently, there is an ‘overflow’ in stores.
So, it is essential to recognise the symptoms of excess inventory, so you can be better prepared to avoid the consequences of holding it. But what do you need to look out for?
1) Pile-Up in the Warehouse (Overcrowded Warehouse)
When logistics see volume increase it leads to a pile-up of stocks in your warehouse. This might further lead to space shortage.
For many companies, over-stocked inventory is physically visible. In fact, this can often be the very first thing employees see when they arrive at work. Put simply? The warehouse is not big enough for the overstock you have — and it’s not moving.
In the case of Walmart, their excess inventories filled the backroom as additional sat in pallets clogging up the shop floor.
Often this symptom is overlooked. Afterall, if you look at something for long enough it quickly becomes the new norm. Consequently, the procurement manager or purchaser no longer realises they have an overstock issue.
The problem can become so severe that businesses require outside storage or even investment in new facilities. A further consequence is that the warehouse processes become cluttered and lack serenity.
2) Stressed Working Capital
The discomfort of carrying overstock is often felt by the finance department. Finance will see an increase in stock investment and in capital investment KPIs like Inventory Value. This might leave working capital ‘in the red’ or increase the business’ debt.
One method used by financial managers to analyse inventories is through liquidity, i.e. evaluating the company’s ability to honour obligations using the money currently in the bank plus monies to be received.
Having too much capital tied up in stock often leaves businesses illiquid, forcing them to increase their reliance on debt. If the excess inventory is hampering liquidity, the financial manager often insists that inventory be reduced.
3) Regular Fire Fighting
As a result of excess stock, Inventory Managers will see their overstock KPIs such as Inventory Value vs. Stock Turn diminish.
Inventory Planners, on the other hand, will see an increase in Overstock Exceptions putting greater pressure on their daily workload.
By the time you’re in this situation, it is often too late to perform a thorough inventory analysis to see which parts should be reduced. Optimising stock isn’t just lowering levels of inventory, it’s having the right part in the right place at the right time.
Reducing stock in a way that doesn’t adhere to an overall inventory strategy ultimately results in quick changes that achieve the short-term effect of lowering stock. However, without proper consideration, this can hit customer service as your operation becomes plagued by stock-outs.
Common Causes of excess stock
Now you know what symptoms you need to look out for, let’s have a look at some common causes of excess stock. Sure there are lots of reasons why businesses end up holding too much stock. But here are a few common examples our consultants come across.
1. Poor Demand Forecasting
Many companies are prone to overstock due to the number and variety of products/items they need to plan. As a result, they are more likely to deal with:
- Large & diverse product assortments
- Irregular & volatile demand patterns for some products
- Slow-moving demand for other
- High service level requirements
- Regular product suppression/substitutes
The consequence here is that you need a variety of forecasting and inventory models to maintain a clear picture. Additionally, as new products are released and others move through the product lifecycle, it’s important to capture & utilise historical demand appropriately.
The problem, of course, is that spreadsheets or even common inventory and forecasting systems lack the capability to tackle this complexity.
2. Supply Risks
Inconsistent supplier lead times result in lots of headaches. In a bid to cut through the uncertainty, many supply chain teams over-order to prevent stock outs.
3. Supply Chain Complexity
In simple businesses where there is just a single warehouse, its easier to anticipate how much stock you need. However, in more complicated multi-site or multi-echelon supply chains, its easy to loose sight of the inventory requirements.
Even if you successfully optimise stock levels at each location, you may still end up holding far too much inventory throughout the wider supply chain.
4. Poor Replenishment Calculation
Optimal replenishment is only possible if you have the correct parameters in place. But its also important that the right replenishment model is applied.
Afterall, replenishment in a food environment is very different to replenishment in a fashion or FMCG business.
If you fail to take into account key parameters like stock on hand, lead time, desired service level, and product life cycle phase, excess stock levels will slowly build until you have a real issues on your hands.
5. Miscalculating Safety Stock
If safety stock levels are only reviewed once every six months, they may be well over-inflated compared to potential demand, leading to an accumulation of additional stock.
6. Product Life Cycle Management
All products have a life cycle that sees an uptick in demand followed by a plateau and a slow decline. If stock levels aren’t adjusted when decline beings to happen, the result is excess inventory. And if this isn’t dealt with correctly, you may be punished. That’s why obsolete stock management is critical.
7. 100% Stock Availability Obsession
More availability means better service levels. But 100% availability comes with a significant cost. Thefore service levels must align with the importance and value the product delivers.
8. Excess and obsolescence
Unexpected trend changes in a product can beat our forecast and make the product become obsolete. Sometimes, without any warning.
Extra stock is bad for business. It takes up valuable warehouse space and costs you a lot of money while it becomes obsolete. So how do you get rid of it?
Reducing excess: A real customer case study
Routed by its traditional family values, MEON has evolved from an import and expert agency to become one of the leading suppliers of line marking and surface repair solutions. However, with continued growth on the horizon, Meon needed to address its excess stock challenges.
By taking steps to improve forecast accuracy and modernise its supply chain processes, the surface specialist was able to satisfy its growth ambitions while keeping stock levels under control.
Russell Smallridge, Supply Chain Manager at MEON explains:
“We are now much better positioned to anticipate what is around the corner. As a result, availability has increased by 5%. By helping us to seamlessly align inventory levels to the forecasted demand, we can ensure customer orders are fulfilled on time and in full; all without increasing excess stocks.
How to beat the count
So, what can you do with that excess inventory now? You could burn the surplus stock to get rid of it easily. Although this is not advisable (especially for flammable items).
Jokes apart, writing off obsolete inventory will come at the cost of your margins. Accepting that they no longer have value or have a negative value (due to holding cost) for your business can be a hard pill to swallow and this won’t impress the finance director or the board.
The original investment in these items has already been lost, and continuing to let them take up space in your warehouse will only make these losses worse.
This is an example of the “sunk cost fallacy”, so getting rid of it is the most cost-effective choice.
Thankfully, this article will teach you how to get up off the canvas and come out swinging.
It’ll give you tricks of the trade utilised by thousands of successful companies all over the world.
It’ll help you fine tune your inventory strategy. Take control of your assortment. And tackle supplier issues head on; all as you eliminate excess stock!
But before we go on, know this isn’t an easy thing to do. To win this fight you have to have the stomach for it. You have to train and be ready to take some hits along the way. And as most experts will tell you, there’s only so much you can take from others.
At some point it becomes about you. That point is now. So tuck your jaw in, and let’s talk strategy.
Who’s to blame for excess stock?
It’s perhaps not conducive to office harmony to start pointing the finger. After all, when things go wrong, your time’s better spent working out solutions in place of apportioning blame.
That said, if you better understand why you’re in this mess, the solutions might come quicker.
And excess stock’s a big mess.
So is it the supply chain team? Perhaps that makes the most sense? They’re in charge of purchasing.
Maybe Finance could’ve stepped in? Or the Planning team? Or the CEO? Isn’t this the C-suite’s job?
Well, sadly if you’re in management, there’s bad news. Because this almost certainly falls on your shoulders.
Management determined whether the product was stocked or not, the sourcing strategy and target service levels. And these three elements are critical factors.
But let’s move on from the blame game and offer a remedy to stop this happening again.
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How to Get Rid of Your Excess Stock:
To tackle your excess stock gremlins, we have outlined 8 simple steps to help you eliminate the surplus stock that is holding your business back.
By following these tips, you will be able to minimise inventory costs and free up working capital, both of which will be music to the financial director’s ears!
8 steps to “painlessly” remove excess stock:
Step 1: Understand the size of the problem
As it’s where a huge amount of your capital’s invested, it’s probably fair to say inventory value was where your excess stock problem first reared its head.
A sharp rise in value should ring alarm bells.
But many struggle to see past inventory value. And without segmenting the value held in individual stock, it’s impossible to see problem from opportunity.
And this leaves a bigger problem, in that most have no idea how much excess stock they actually have.
- Is the stock you hold a short-term problem, which will be solved by fast moving products?
- Or is it tied up in stock which hasn’t sold for a considerable period?
Inventory value without analysis is irrelevant
Inventory value without analysis is irrelevant
And here are some calculations worth making…
- Inventory Value vs. Stock Turn
- Inventory value per phase of the Product Life Cycle
- Inventory value per product group or classification
- Stock Days
Once you have answers to these you’ll be far better equipped to know how much of a problem the overflowing warehouse is. Without them, you’re whistling in the wind.
Step 2: Define what’s important
Once you know which excess stock is a problem, and which is an opportunity, it’s a lot easier to work out how the problem arose.
Naturally your focus should be on the products that matter most
And making sure your priorities are crystal clear will help sharpen your focus. This is defined as service levels. And they’re driven by management.
Service levels concern the time, money and space behind business decisions. And your business, like every other, will have limited capacity on these.
If your service level targets are spot on, you’ll ensure the investment (in money, time or space) revolves around the products you rely on the most.
“How do I know which products are the most important?”
If you don’t know already, it’s time you worked it out. And merely ‘number of sales’ isn’t the way. You don’t want to wrongly apportion importance on a loss leader.
You have to define their value to your business.
Think about revenue per SKU. Margin contribution per SKU. Number of customers per SKU. Order numbers per SKU. Profit percentage per SKU.
All of these will give you a much clearer understanding of your portfolio.
Step 3: Analyse your service levels often
Remember, we’re not just trying to sort out the problem of your existing excess stock, we’re trying to stop the problem from rising again in the future.
And to do that, we need to set good habits. One of these good habits is continuous analysis on your service levels.
By their very nature, service levels are incredibly hard to measure. But that’s not an excuse to ignore them. If anything, it’s a sign you should be focusing on them even more.
If your supply chain costs are soaring, your customers are grumbling or going elsewhere, your business goals have changed or you’re just struggling to hit target… it’s time to analyse your service levels.
But make this a regular occurrence. Don’t wait for any of the above to happen and it’s far less likely they will.
Step 4: Re-think your stocking strategy
The cold-hard reality for most businesses is that the stocking strategy’s off kilter. It lacks clarity or logic. Consequently, the business invertedly invests in the wrong products and excess stock levels spiral.
Top tip: Your stock strategy will set the rules for effective assortment decision-making. Without them, you’re making decisions on nothing more than whim or conjecture. To assess your stocking strategy, check out our stocking policy checklist.
Step 5: Take control of your product lifecycles
If you’re not aware of the stages of a product’s lifecycle, study the below image. Save it to your desktop. Print it off. Put it on your fridge.
Put it anywhere which will help you learn it to memory.
Now think about the most likely stage which results in excess stock.
On the face of it, the ‘phase out stage’ looks most likely. You’re phasing this product out for a reason, so it’s a natural assumption to expect excess.
The truth is, excess can come at any stage. And each stage brings its own challenges.
Here are some questions to ask yourself for every stage…
The review stage
- Is your new product going to offer genuine value to the assortment?
- Will there be sufficient demand? And what will that demand look like? What does your market research tell you about ideal supply levels?
- What are the margins and do they justify its launch?
The introduction stage
- How much of a particular product should you buy with the initial purchase order?
- From which supplier should you source your products?
Get this wrong and you’ll fail on launch. Get it right and you’ll have the perfect amount of stock. But how much is the perfect amount?
The growth stage
You know you need more stock, but you don’t know how much more. Up until now you’ve been resting on guesswork, market intel and estimation. If you’re trying to grow, not enough stock simply won’t do.
- Should you still be using qualitative models? Now you have more data, you need to use it. Adapt to a quantitative model.
- What are the predicted increases in demand and how will they affect existing stock levels?
The maturity stage
The dizzying highs of growth might be coming to an end, but spotting the maturity stage is half the battle.
There will, at some point, be a difference between forecasted sales and actual sales. When will this happen? It’s almost impossible to predict. So stay alert and be ready to adjust your service levels swiftly.
The decline stage
In a similar way you can predict growth from introduction, the decline stage follows a similar pattern, just in reverse.
Naturally, you need to arm against obsolescence, lest you speed this stage up remarkably. But excess stock becomes all the more likely as you do without accurate forecasting.
At least here you’re armed with the most data possible at any stage of the process.
Top Tip: Your inventory strategy must align with the respective phase of the product lifecycle. Read our guide to product lifecycle management.
Hopefully, this blog will help you to ensure your tactics are up to scratch.
Step 6: Rationalise your assortment
Rather than trying to rationalise whether you should eradicate a product from your assortment, it’s a far easier task to analyse the decisions for keeping it.
There are many questions you can ask yourself, or those more knowledgeable, to get a good answer to this too.
For a full breakdown, check this assortment planning article. But think along the lines of…
- How regular are sales?
- How much revenue is made per item?
- And how much of that is profit?
- Is the customer base wide or narrow?
- Can you offer alternatives?
Try the stocking index for a more accurate analysis
If any product has a rating of less than 35/100, you simply shouldn’t be stocking it.
But your stocking index needs to be tailored individually and appropriate to the wider business.
How you set your parameters depends on each attribute’s importance. For example, if you’re a new brand, the total amount of new customers might be a high consideration.
If it’s crucial you stay cash rich as a company, turnover needs to be heavily weighted.
If you’re an established brand with loyal customers, the number of A-customers should be key. Here’s an example for one product rated out of 100…
Stocking index
| Criteria | Weight | Boundary | Score | Result |
|---|---|---|---|---|
| No. Order Lines | 20 | > 30 per month | 40 per month | 20 |
| Turnover | 20 | > £5000 | £6540 | 20 |
| Gross Margin | 10 | > 20% | 15% | 0 |
| No. Unique Customers | 20 | > 5 per month | 16 per month | 20 |
| No. A Customers | 10 | > 3 | 1 | 0 |
| Service or Strategic Item | 10 | Yes | Yes | 10 |
| Alternative Stocked Product | 5 | No | No | 5 |
| Supplier Ranking | 5 | Top 50 | In Top 50 | 5 |
| Total Score | 100 | 80 |
| Score 50 – 100 | Stocked ✔️ |
| Score 39 – 49 | Transition |
| Score 0 – 29 | Non-Stocked |
Once you have a rating for each product in your assortment, it’s a lot easier to define whether it should be kept in stock or not.
Step 7: Challenge poor supplier performance
You’ll be all too familiar with poor supplier performance of late. Huge external elements like global pandemics provide inescapable problems, and shift blame from the supplier.
That said, not all suppliers are created equally. And given the potential cost to your business of poor supplier performance, you must act.
But before you act, you need to benchmark. Here are few measure you might want to think about:
On-time-in-full rate
On-time-in-full (OTIF) rate is a good place to start and often the most common KPI.
To put it simply, if the amount of complete orders delivered on time falls short of their estimate, it’s asking to be critiqued.
Top Tip: Measuring availability can be a little tricky. Check out our complete guide to OTIF to give yourself a head start.
Lead time variance
Lead time variance
What a difference a day makes. To both you, and your customer. And so a difference in lead time between expected and actual delivery is a situation ripe for critique.
Obviously before you go steaming into a difficult conversation however, think about how crucial this supplier is to your business, and the scale of the problem at hand.
If they’re a main supplier and it’s just one shipment gone awry, a constructive conversation’s probably best than cancelling the contract.
Step 8: Clean up your master supplier data
To correctly challenge a supplier, supply chain team or even the top level management, you need data.
But to be frank, without data from every part of your business it’s impossible to make good decisions.
Your suppliers, customers and competitors have all been disrupted in the recent past. Some will still be feeling the constraints of the global supply chain.
But others won’t.
And as we mentioned earlier, not all suppliers are created equally.
Have any of your suppliers closed factories? Are they planning on going back to ‘business as usual’? And if so, when will that happen?
What sort of lead times are now going to be commonplace?
Information is power. And knowing the abilities of your suppliers will stand you in great stead to analysing their worth.
Make sure you collect information and update systems fast and often.
Here’s a quick fire supplier master data checklist.
Step 9: Collaborate with passion
The more information your supplier has, the easier it is for them to fulfil future demands.
The same applied for your customers. The better you understand their inventory requirements, the less likely your excess stock solutions work.
Afterall, they’re far less likely to leave you in the lurch with surprise orders, out of the ordinary volume requests or irregular order patterns.
Working out which information should be shared between you, your suppliers and your customers is the east part though.
Sharing it takes dedicated effort but could unlock better performance in your own business quite quickly.
Final takeaways…
We defined excess stock. We have highlighted the dangers of leaving it unchecked. And we have even offered some strategies to help you eliminate the causes of Excess stock within your own business.
Now, it’s time for you to act!
To help you in your battle against surplus stock, we have summarised the points in this article into a simple playbook.
Download our free Excess Stock help sheet below.
With it, you’ll be able to:
- Fine-tune your inventory strategy
- Take control of your assortment
- Tackle supplier performance issues head-on
