If rising holding costs, an overfilled warehouse, or high customer demand become a concern, you may have an overstock problem.
Overstock inventory is excess stock that impacts operational efficiency. It can limit cash flow and slow down productivity in the warehouse, leading to lower profits and dissatisfied customers.
This guide will explain overstock inventory, how to identify it, and how to manage it.
What is overstock inventory?
Overstock inventory, also called surplus stock or excess inventory, refers to excess stock that exceeds customer demand. It ties up cash flow, increases holding costs, and raises the risk of product spoilage or obsolescence.
Overstock inventory vs understock
Overstock inventory refers to holding too much stock, and understocking is the opposite – where demand exceeds supply.
Overstocking leads to higher inventory carrying costs and an increased risk of inventory shrinkage. Understocking, on the other hand, leads to stockouts and limits your ability to fulfil customer orders fast enough to meet demand.
Both reflect issues with your inventory planning and purchasing process and should be attended to immediately.
Identifying overstock inventory
To differentiate between slow-moving stock and actual overstock, calculate your inventory turnover rate. Inventory turnover measures how quickly products are sold and replaced. Compare this to sales expectations, inventory levels over time, and industry benchmarks to identify overstocked items.
Why overstock inventory is a problem
Overstock ties up capital, takes up valuable space, and increases the risk of product loss due to spoilage or obsolescence. Additionally, it drives up costs for labour, holding, and warehouse management.
Common business risks due to overstocked inventory
- Increased holding costs: Storing excess items raises warehouse costs and limits space for faster-selling goods.
- Tied-up investment: Overstock locks up capital, slowing down cash flow.
- Risk of product loss: Longer storage increases the risk of spoilage or obsolescence, particularly for perishable goods or tech items.
- Higher labour costs: Overstock requires more inventory management, adding to labour costs.
Are there any advantages to overstock inventory?
While overstock is generally negative, safety stock – a small buffer of extra inventory – can help you prevent stockouts and respond to sudden demand changes. However, even safety stock comes with risks if mismanaged.
Common causes of overstock inventory
Overstock inventory can happen for several reasons:
- Poor demand planning
- Inaccurate inventory
- Overcompensating to prevent stockouts
- Unexpected shifts in supply or demand
1. Poor demand planning
Demand forecasting involves planning for future customer demand based on historical trends, expected market changes, and business expertise. Effective forecasting helps you predict what to stock and when – ensuring you have the right inventory levels.
Poor demand planning can lead to unexpected swings in demand, products underperforming, or seasonal shifts, which in turn result in overstock inventory and poor sales performance.
2. Inaccurate inventory
Real-time inventory tracking helps you monitor stock levels across locations and track incoming and outgoing goods. This visibility allows you to quickly spot when a product is piling up and take action.
Poor tracking and inventory inaccuracies can lead to an unnoticed buildup of low-performing stock, resulting in overstock before it’s addressed.
3. Overcompensating to prevent stockouts
Businesses that have experienced stockouts may carry excess safety stock out of fear, especially when poor forecasting contributed to the initial stockout. Overordering or over-purchasing often leads to overstocking problems.
4. Unexpected shifts in supply or demand
Unexpected market changes, such as shifts in customer demand or economic conditions, can disrupt sales expectations and result in excess stock. While some changes can be anticipated, unforeseen issues require flexible supply chains and accurate inventory tracking to avoid overstocking.
How to avoid overstock inventory: 10 effective strategies
With careful planning, good inventory tracking, and organisational flexibility, you can prevent overstock inventory from hurting your business performance.
1. Demand forecasting
Good demand forecasting relies on software that integrates historical data with industry research and expertise. This may require investing in sales and inventory management tools to track inventory and sales metrics and understand their impact on each other.
2. Cloud-based inventory tracking
Cloud-based, real-time inventory tracking lets you monitor stock levels without needing constant physical audits. You can track stock from suppliers to customers, across locations. Cloud hosting adds benefits like remote access, lower IT costs, and easy updates. It also enables automation for tasks like reordering and reporting, saving time on manual processes.
If you think your business could benefit from cloud-based inventory software, try Unleashed free today for 14 days.
3. Sales tracking
Tracking both sales and inventory metrics helps identify underperforming products. Not all slow-moving items are problematic, but combining slow sales with poor inventory management can create excess. Regular analysis of stock performance will help you decide what to keep and what to discontinue.
4. Just-in-time stock control
Just-in-time (JIT) stock control is a lean inventory strategy which is achieved by purchasing goods only as they’re needed. It better aligns customer demand to raw materials or product supply, because your organisation only acquires new materials when required to fulfil customer orders.
JIT stock control requires a highly efficient supply chain to ensure materials arrive as needed.
5. ABC analysis
An ABC analysis categorises inventory based on its value to your business and organises stock from most to least valuable. It can help you to focus on the products which matter most, and which drive your greatest revenue while deprioritising products which don’t make the same sales.
To conduct an ABC analysis, categorise your products into three groups:
- A group: The top 15% of your products, contributing the most to your annual revenue.
- B group: The next 20%, with medium value to the business.
- C group: The final 65%, and the least valuable products in your inventory.
6. Calculate minimum and maximum stock levels
With more accurate inventory and sales performance data, plus demand forecasts, you can calculate optimal stock levels for your business. These guard rails will help prevent both under- and overstocking in future, as they can serve as warnings of an approaching red flag.
Setting minimum and maximum stock levels, based on accurate data, helps avoid both over- and understocking. These thresholds can serve as warnings, with software automating reorders to reduce manual workload.
7. Conduct regular audits
Regular audits maintain stock accuracy and help assess the condition of items. It's also a chance to review inventory metrics like turnover rates and carrying costs.
Read our complete guide to stocktaking to learn best practices and useful techniques.
8. Clear out old stock
Clearing out excess inventory frees up storage space to prevent overstock from cluttering up your warehouse. You can get rid of old stock by running promotional discounts, bundling unmoving products with top sellers, or finding meaningful ways to give your dead stock away.
9. Increase sales
Increasing sales is a good way to improve inventory turnover and keep cash flowing through the business. This can mean increasing or optimising your marketing efforts using tactical strategies that result in more sales.
Some strategies to consider:
- Expanding sales channels to include more opportunities, such as social media stores, ecommerce platforms, and online marketplaces.
- Setting competitions between sales team members to focus more on slow-moving stock.
- Bundling risky or slower stock with higher-value products, to increase their marketability and sell them more quickly.
- Investing more into marketing, spreading the word about your wider array of products that customers may not know about.
10. Continuously refine and optimise
The market won’t stay still, and neither can you. It’s best practice to treat inventory management as a constantly evolving process, taking time now and then to analyse your KPIs, strategies, and sales processes and determine if they’re still a good fit for the current market.
If you build the idea of continuous improvement into your processes, your business will keep adapting to the changing economic landscape. This can help you stay ahead of demand changes.
How to deal with overstock inventory
Preventing overstock inventory is one thing, dealing with it when it happens is another.
Let’s look at some effective ways to manage and clear out your overstock inventory.
1. Create product bundles
Bundle higher- and lower-value products together to increase the appeal of your overstocked items. Look for opportunities to increase the value of a specific offering with complementary goods.
Let’s say you’re having a hard time selling shampoo, but your conditioner is flying off the shelves. Creating a discounted bundle offer of shampoo together with conditioner may help you provide more value to customers while also clearing out the unmoving shampoo inventory.
2. Create discounts and promotions
Limited-time discounts or tiered pricing based on quantity can be a great way to get rid of overstock inventory. Customers will be more likely to purchase a product if it’s on sale, and more likely to buy in bulk if there’s a benefit attached to doing so.
3. Speak to your suppliers
Some suppliers may be willing to take back unselling inventory and refund you for the purchase. While this might not always work, vendors that supply to businesses having more success with your overstocked products may be looking for a quick way to restock and supply those firms.
4. Look for alternative overstock solutions
Sometimes the normal ways of doing business just won’t cut it – you have to get creative.
This could mean:
- Selling excess inventory to a liquidation company
- Donating unsold stock to charities
- Reaching out to similar businesses to discuss an exchange of goods
- Listing your items on eBay, Gumtree, or a similar online auction marketplace
Think beyond the standard sales strategy and try to come up with other creative ways to offload your excess goods.
