Far from being just a roomful of stock, your inventory has a lot of moving parts. Prices are variable, order quantities are difficult to estimate, and mistakes can be costly. This includes having too much extra inventory, which can burden your business by obstructing cash flow, increasing storage costs, and creating safety issues.
Here are all the ways your retail or ecommerce business can manage excess inventory—and prevent it from piling up in the future.
What you need to know
- Excess inventory is any goods or materials that exceed customer demand. Some excess inventory is natural, but having too much can be a burden on cash flow.
- Excess inventory results from accidentally or purposefully ordering too much stock, supply chain issues, or not actively getting rid of obsolete stock.
- There are many ways to sell excess inventory to customers, other businesses, or back to vendors. You may also be able to reuse or upcycle old materials.
What counts as excess inventory?
Excess inventory is any inventory that is exceeding customer demand. Some excess inventory is inevitable and often desirable—retailers should keep some extra stock on hand to meet fluctuations in demand. However, goods left over after a slower-than-expected holiday season, for example, can be a problem if the business has no way of selling it as-is. This can have negative impacts on the following areas:
- Cash flow: Being unable to sell inventory that you’ve paid for reduces revenue that could be used to pay bills or buy usable inventory. Crowded storage facilities also prevent you from using the space for inventory that’s selling.
- Storage costs: Storing inventory can be a major expense, associated with maintenance and utility bills—higher for luxury or perishable items—plus labor costs, so it’s important to keep your inventory streamlined.
Safety: Overcrowding your inventory can create unsafe conditions if not properly managed, leading to workplace accidents or financial penalties (if assessed by inspectors).
Lower your warehousing costs by working with a third-party logistics (3PL) company.
Common causes of excess inventory and how to prevent them
Excess inventory results from operational factors—such as not having a proper inventory management system—or economic factors that are less within your control. Automation can eliminate some of these problems, but others are unpredictable. Some of the most common causes of excess inventory are:
Overordering
Especially around the holiday season, you may be tempted to order far more stock than you need to meet possible demand. To avoid this, use demand forecasting software that analyzes your historical sales data, while keeping abreast of market trends.
Maintaining too much safety stock
Similar to accidental overordering, consciously maintaining too much extra inventory in the hopes it might sell will achieve the opposite—you’ll lose inventory space for better-selling goods and lose money on storage costs. Use your inventory management software to calculate the optimal amount of stock you should keep on-hand.
Supply chain issues
Shortages or delays somewhere along the supply chain might tempt you to overorder or needlessly increase your safety stock. This causes the bullwhip effect, in which your increased demand causes ripple effects up the supply chain, further exacerbating shortages or delays. If you keep a diversified pool of suppliers—or a global supply chain—and build strong relationships with them, you’ll avoid panic-buying in times of fluctuation.
Keeping obsolete inventory
Keeping outdated inventory on hand only drains space and resources. This is usually the result of poor manual inventory tracking or too much investment into slow-moving items. An inventory management software will track product lifecycles and automatically review your inventory for obsolete items.
6 ways to get rid of excess inventory
While inventory management software can help you identify excess stock, you’ll have to decide how to sell it. (You can also write off some excess stock for a tax deduction.) Here are some common and easy ways to sell or repurpose excess inventory:
1. Discount your products
Customers will always appreciate a good deal, and they’ll respond to reduced prices on inventory you want to liquidate. Seasonal clearance sales are a common way to accomplish this, and any marketing for a big sale will attract new customers, whose customer lifetime value will offset the lower profits you earn from selling discounted goods.
2. Bundle your products
Combining slow-moving products into a bundle with fast-moving products can also help you get rid of excess inventory. Try upselling and cross-selling other products based on customer habits. For the best results, combine bundles with discounts, offering lower prices when items are bought together.
3. Return your stock to vendors
Depending on how old your excess inventory is, you may be able to return it to the vendor for a full refund or partial buy-back. This becomes easier if you discuss returns when negotiating your contract, and especially if you maintain a close relationship.
4. Donate extra stock (and get a tax write-off)
While the rules and limits change each year, the IRS allows deductions for donated merchandise. Find a non-profit or public organization that can benefit from your merchandise. Depending on your brand image, you can advertise your donation as part of your mission.
5. Sell or trade extra stock to other businesses
Other businesses may need your excess inventory—partner with other retailers to offload anything you don’t use, especially if your industry frequently creates excess inventory. This will free up your inventory space for a small return, and open the door to more extensive branded partnerships.
6. Recycle or upcycle your stock into new products
Raw materials and components can be repurposed to create new products. This way, old items can become the basis for updated or rebranded versions, or even new product lines. If you don’t have a use for your inventory, selling or trading excess stock to other businesses that need it is simply another form of recycling.
How to automate your inventory management
Inventory management requires collecting data, calculating how much inventory your company is buying, and how fast it’s moving. Inventory management software automates all this and calculates the ideal amount of each item in your inventory you should keep. If you want a hands-off but effective method of inventory management that’s free of human error, begin by choosing an inventory management software.
Economic order quantity (EOQ)
If you’re curious how these softwares decide the ideal amount of stock you should order, they use the economic order quantity (EOQ) formula below:
Q = Quantity, or the ideal number of units of product you should keep in stock
D = Demand, or how many units you sell in a year
S = Sold, or how much you pay to buy one unit of product
H = Holding costs, or how much you pay to store one unit of product for a year
Learn 15 tips to help increase your ecommerce sales.
