Why Is It Bad To Have Too Much Inventory?
Find out why having too much inventory is bad for your business. Learn about the problems associated with excess inventory and how to fix them!
When thinking about doing a business, there are a lot of factors that need to be focussed on. First of all, what will you do? What are you good at doing? What is your dream business? Do you want to work online or start a physical store? All these questions will puzzle you at the start. But later on, when you clear your mind, you will eventually know your dream job.
Now, if you want to do an e-commerce business on an online platform or at a physically created enterprise, you could always take guidelines from some of the well-known, relevant businesses brands. For instance, Amazon has been the most famous worldwide platform performing e-commerce activities for a long time now. Therefore, it has proven to be the most accurately working and trustworthy platform. The main thing you will be focussing on while running an e-commerce store is the inventory of your business. Because it is only the products you sell or stock in your business that will earn you a handsome amount of profit.
What is overstocking inventory?
If we directly jump into the exact definition of overstocking, it can be understood as "the excess amount of goods stored for any future related purpose." Now let's dig into the details of this concept of overstocking. When does a company usually overstock its inventory? What do you think? Only one obvious answer that comes to all of our minds is to meet the future demands of its customers. Right?
But do you ever wonder if it is always necessary that you preserve a large amount of stock at the back-end of your company? Or does it create difficulties for the workings of your business? Of course! The answer to the latter one is YES! It is not always fruitful to keep a large amount of stock in your industry. Especially when your business is dealing in various products, overstocking could lead to the depreciation of profit and eventually increase holding costs. Therefore, you should always be focused on the fact that overstocking is creating problems in the way of your company's profit or not.
How is your inventory cost calculated?
It is essential to calculate the cost of your inventory carefully because if this is recorded incorrectly, it could affect the entire working of the business. Moreover, you should know when to invest more and when to stop buying more stock.
Therefore to know the cost of inventory that you are holding up in your business, you need to apply the following formulas;
- Gross margin return on investment: Gross Margin / Average Inventory Cost
- Sell through rate: (Quantity Sold / Original Quantity Available) x 100
- Inventory Carrying Cost: Sum of all costs for unsold inventory ≤ 30% of inventory's value.
- inventory-to-sales ratio: Available Inventory for Sale divided by the total quantity of goods sold.
By using above stated basic formulas, you could quickly get the image of the actual assets working for your business. In simple words, you could understand which of your business products are eating up all the costs and minimizing your business's profits.
Furthermore, it would be practical to hire a team of experts to carry out these estimations. By this, you would be sure that the position visible to you at the end is accurate and without any further doubts. So you would easily then take necessary measures to expand those areas that contribute to the betterment of your brand.
Reasons for overstocking:
As we have discussed above, the reason for overstocking inventory is to fulfill the future needs of the business. But people don't sometimes make the right decisions in terms of stock. Some of the main reasons to keep your business with overstocked inventory are written below;
Not understanding the demands of customers:
Customers are the basis of any business's success. So to get your business and its activities on a higher level, you must satisfy all of your customers.
In addition to this, to avoid the risk of excess inventory, you must be careful about the customers' demands. Focusing on what the customers want helps you manufacture only what they want and eliminate the waste products of the organization.
Poor inventory management system:
Another main reason for overstocking in your business is the poor inventory management system. It would help if you were careful about how your business's inventory system is running. In addition to this, the involvement of experienced employees and experts in handling your inventory will undoubtedly result in a good outcome.
Therefore, all your orders should be checked and maintained timely. Shipping services should also be managed accordingly. However, if the inventory management system is handled poorly, it will overstock your business.
If any company faces troubles or falls continuously, your business has incompetent staff no matter what it tries to do. Don't ever give the responsibility of your business's main workings into the hands of unskilled people. Because by one way or another, it will result in the overstocking of the inventory.
No expert monitoring
When handling the inventory management system of any company properly, you should monitor it 24 7 during the workings of the warehouses. When there is no proper observation of the customers' demands, which stock is being ordered, and how it is being shipped, overstocking occurs. A slight carelessness could result in the shutting down of your business.
Stocking, 'out of fear.'
Another reason for making too many orders is the fear of the end of the stock in the market. Because in some situations, when a product is being sold a lot and considered a favorite for everyone, owners of the business fear that it might end due to excessive flow in the market. Therefore, you need to be focused and concerned enough before ordering an excessive amount of stock because it will result in overstocked items at the end, which will create havoc in your business.
Adverse Effects of overstocking:
Holding costs increases:
The most prominent difficulty that you will face in terms of overstocking is that you have to pay much higher storage costs for them. Until the products are shipped and sold out, you would have to pay their carrying costs.
In addition to this, we must not forget that if you are dealing in electronics, you would never pay much storage cost because this is an expensive category.
Storage capacity is total:
When the new product in the market is launched, and you are all set up to order it in bulk for your customers, but if there is no space in your storage rooms, where would you keep it? TThat'sright! It is the most challenging time for you and your business, of course! Therefore, you need to manage your stock effectively because it could lead you to bear losses instead of earning profits if you cross the line.
It is no rocket science that if you cross the line store and bring new products, you need to make room in your warehouses first! But the situation of great dilemma arises when there is already a ton of stock lying idle in your storage rooms.
No new products are approached:
When dealing with your overstocked warehouses, you have no time to invest in searching for new products. Which in turn leads to bear significant losses in your business. Therefore, if you don't have time yourself or are not an expert in the inventory and stock areas of the company, you could always hire inventory management software.
This software, when hired, will help you a great deal to minimize your workload and automate your inventory-related activities. This will result in the effective and efficient management of your business activities, and overstocking will be prevented.
Profit is affected:
When there is no new technology used, old production methods are being carried on, and there are piles of stock laying in your storage rooms idly, how would you earn?
TThat'sright! We do business for earning purposes only, so to make an incredible and saturated profit, our business activities should also be up to the mark. But it is a fact that if your business is overstocked without any reason, you would never be able to complete your mission and vision. However, the stock preserved will only cost you more and more each day which will, in turn, minimize your profit.
Expenses overlap the income:
It is a well-known and obvious fact that you have to check up on them when you preserve preserving a large amount of stock in your storage houses. The costs you will have to spend on that stock will not be less but regularly increase. So if you ddon'tget rid of the excess inventory lying in your ccompany'swarehouses, you would not be able to earn a profit, but it will get more and more expensive each day.
Some of the ordinary expenses that you may bear in terms of overstocking your business are;
- They were carrying the costs of the products.
- Maintenance cost of the products.
- You are paying the experts who monitor them on a weekly or monthly basis.
- Testing and running costs of electronic products.
- No new technology is obtained:
It is evident that to master something; you have to take some practical and necessary steps. Similarly, in business, you need to use the latest and modern technology to quickly carry out your business's operations. The chances of errors are also much less than in the past. But some of the people doing business these days are still living in the past. They are using the same orthodox methods of production and maintenance that were passed onto them by their ancestors. Not modernizing the orders receiving process and segmentation system could lead you to face severe business loss. However, when the business's revenue and profits are affected, they realize that they need to change.
Steps to manage too much inventory in your business:
- Know when to stop ordering products.
- Creation of segments of the products.
- Reduce waste products.
- Manage orders effectively.
- Hire expert officials.
- Automize your system.
- Improve your service and dispatch system of the products.
As we have heard a lot before, inventory is an essential part of any business. And we all agree with this because your business entirely is based upon what you offer to sell to the public. Therefore, your inventory should also be managed very carefully. You should always know when to reorder the product and when to stop. In addition to this, if the receiving order system faces any technical issue, there are also chances of an overstocked situation in your business. It would help if you established practical ways to prevent overstocking your business because it will create havoc in your business, as there will be no space for the new products to be stored. But you have to make sure that all your orders are received and dispatched preserve. If you cross the line, preserve on their time to prevent overstocking in your business.