Overstocking: What Causes Overstock & How to Avoid It

Perhaps you have been there or find yourself there right now: overwhelmed with goods and perplexed. Where did you come from? How you get out is more crucial, however. We've outlined the typical reasons for overstocking, the expenses involved, and what you can do to finally get rid of those things that won't move.

Overstocking and supply chain shocks can happen to the best of us, as the last year has shown. Understanding why it happens, its natural effect, and what you can do are crucial first steps in understanding the problem practically every sector faces.

What is overstocking?

Overstocking, often known as "surplus stock," occurs when retailers buy more merchandise than they can sell. Retailers that buy too many goods end up with different products on shop shelves or warehouses, which may reduce their profitability.

Reasons for overstocking

The good news is that almost all of the reasons for overstocking can be avoided by meticulously calculating, planning, and analyzing your inventory. Overstocking of inventories has frequent reasons, including:

Unpredictable consumer demand

Overstock often results from underestimating consumer demand, which costs money and precious shelf space for new items. It's challenging to comprehend customer behavior. But to manage your inventory and prevent excess stock, you must be able to respond to the questions, "Who are my customers?" and "Are they repeat customers?"

Fear of shortages

For many shops, stock-outs or "out-of-stock" situations are a nightmare. Long-term expenses associated with this missed income opportunity include disgruntled consumers, harm to the brand's image, and hastily procured replacement items.

Ineffective marketing promotion

Marketing is crucial for persuading customers to buy your products. Still, it would help if you didn’t believe that because you buy many products from your suppliers, customers would be persuaded to accept them due to a clever marketing effort.

Consumer and sales data must serve as your compass when purchasing from suppliers. If not, you may quickly get overstocked.

Inadequate inventory control

When it comes to preventing overstocking, inventory management comes as standard. However, you'd be astonished to learn that many people still have trouble getting this properly. Purchase costs, shortfall costs, and carrying costs are the three main kinds of inventory expenses.

The costs associated with retaining or maintaining your goods, including labor, transportation, opportunity costs, warehousing or storage, and depreciation, are referred to as carrying costs.

Seasonality

Seasonality has an impact on the majority of companies, whether it be seasonal retail items or agricultural harvesting periods.

Your responsibility is to understand the times that could impact your company and how to prepare for these variations. Strategically unprepared people often find themselves with large amounts of excess inventory.

Addressing concerns with the supply chain

As 2020 showed, supply chain disruptions may occur anytime and for any cause. They have an impact on every industrial area. These discrepancies often cause overbuying, which results in expensive overstock.

Repercussions of excessive overstocking

Overstocking has various negative impacts, but prices are a significant factor in many of them. Overstocking costs money not just at the time of purchase but also for a long time after:

Storage expenses: Storage space is expensive (or pounds if you prefer). However, it also comes at a price: the opportunity cost, or the missed chance to, for instance, put goods that could sell.
Tied-up expenses: Your investment will not be recouped until the cash attached to your items is sold.
Product elapsed time: Not all products fall under this category, but those that do face the danger of expiring or going out of style if they are overstocked.

Methods to prevent overstocking

Purchase inventory control software

Purchasing an inventory management system to monitor, analyze, and compute stock levels would be the first step. Consider your KPIs and write down the measurements you'll be measuring as you search for the best fit.

Creating precise standards for categorizing goods is a good idea. As you complete this activity, consider the various priorities for your items. Consider this question: Is the product essential to the machine's functioning or a particular function? Start labeling your goods after this. Remember to evaluate these categories regularly since they could change.

Observe market and economic developments

It's critical to monitor the market and economic changes to foresee supply chain alterations and lower the likelihood of stock shortages. Google Trends is a handy tool to quickly look up what people discover to be interesting over time. From this point, you can create superior business plans.

Regularly conduct audits

Plan regular inventory audits while keeping an eye on your KPIs. Metrics to measure include cycle time, inventory turnover rate, inventory count, and order fulfillment time. Don't forget to consider the expenses associated with your inventory, including the gross margin return, sell-through rate, carrying cost of your list, and the inventory-to-sales ratio.

Online overstock stock sales

Why not convert the current excess stock you have into cash after you have discovered it? You may create substantial new income streams by selling on Machine Compare Marketplace and converting your unused goods to money.

Currently, Marketplace offers over 260+ brands from more than 15 international manufacturers that advertise their overstock on the website. Beginning your journey by listing your spare parts on this emerging platform is simple and will relieve a great deal of your strain.

Understocking vs. Overstocking

When you overstock, you buy too many products and have extra inventory that you can't sell. On the other hand, understocking results in stockouts because you buy too little effect. Both of these situations cause a corporation to suffer significant losses.

For example, if you understock, you won't have enough inventory to complete client orders. As a result, your clients will likely cancel their purchases and may even decide to acquire the goods from a rival. Additionally, you risk being untrustworthy, which might harm your reputation and be challenging to repair.

Conclusion

It can seem today that overstocking depends on the facts you have accessible. The key is having the proper data value structure in place so your shop can effectively stock consistently, even though it is the first step in obtaining insight into how your company is operated from an inventory standpoint.

The secret to effective inventory management that prevents overstocking is making use of the resources at your disposal to simplify your stocking and assist you in making educated choices about what to buy from suppliers and what to manufacture.