In Pursuit of Profit
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While many companies have faced materials and components shortages leading to stock outs since the start of the pandemic, many other companies have been sitting on excess inventory due to transportation challenges, shifting consumer patterns, and tightening sales distribution channels.
Excess inventory occurs when a business holds more stock than is needed to meet their forecasted demand. It can be the result of flawed forecasting, purchasing errors, improper inventory management, or business disruptions. The latter is what many organizations have been dealing with since early-2020. But, regardless of the cause, too much inventory can cause both financial and operational obstacles.
If your company is carrying an abundance of inventory, it is important to act quickly to get it off your books and out of your warehouses. Use this guide to understand why excess inventory can be a business killer, and what to do about it!
The Danger of Excess Inventory
Do not confuse “excess inventory” with “safety stock.” In the wake of rampant supplier delays many companies employed a strategy of purchasing additional stock to act as a safety buffer amid supply chain uncertainty. This “safety” or “buffer stock” is meant to allow a company to fulfill orders in a timely manner in the face of supplier challenges.
Excess stock, on the other hand, is abundant stock that is unintentionally acquired and held onto, tying up cash flow and stifling business potential. The main problem with excess inventory is that ties up working capital that could be used for crucial business activities like paying employees, acquiring raw materials, fulfilling supplier contracts, and making long-term investments.
There are also physical demands of holding onto excess stock because surplus stock takes space away from inventory that has a higher turnover rate. The opportunity cost of holding onto excess inventory is space and that funds are not available to drive other areas of the company like expanding the sales of more profitable inventory. The result is stymied business growth, and even the potential for business failure.
Additionally, excess inventory carries physical costs as well for the facility storing it and the operations surrounding it, such as:
Lastly, depending on the nature of the goods, excess inventory can also degrade over time – reducing its usable life, making it more prone to failure, or causing it to be less desirable to consumers. Inventory that degrades becomes less valuable over time, shrinking profit margins the longer it is held until it eventually perishes and is written off as obsolete without any return on investment.
Simply put, holding onto excess inventory is like trying to run a race with a ball and chain attached to your ankle.
Resolving Excess Inventory Issues
So, what do you do about excess inventory? There are multiple options for companies trying to manage surplus inventory:
When excess inventory begins to accumulate, the product itself may not necessarily be the problem. Pricing, merchandising, or marketing may be at the root of the problem, especially in retail settings. If that is the case, slow moving inventory may just need a refresh to get out the door. However, you will need to carefully consider whether it makes sense to remarket your excess inventory because doing so often involves an initial cash outlay in the hopes that future sales increases will justify this added expense.
If it is an option to return inventory to your supplier for a full or partial refund, that is a quick way to get rid of excess inventory. In this scenario, you will get all or part of your money back minus shipping and handling costs. Now, depending on how much inventory you have and the nature of the inventory, these costs can be quite steep, but recouping some of your money is better than sitting on aging excess inventory.
If your suppliers will not take your surplus inventory back, your partners may be interested in trading for it. It is like the old saying, “One person’s trash is another person’s treasure,” which is to say that something you have and cannot seem to move could be just wat another company needs for their product or service offerings.
If another company cannot use what you have to offer, maybe yours can! Look for the potential to rework your product offerings to utilize your excess inventory in innovative ways. Upcycling latent inventory is the ultimate budget-friendly move to mitigate the financial impact and preserve cash flow.
If none of these options are feasible, many companies immediately go into discount mode, and start slashing prices. But before reducing the price on excess inventory, trying a bundling sales approach may be worth considering.
Look for ways to pair products that have a slow turnover rate with those that have a much faster turnover rate, to get them cleared out of your warehouse. Bundling can be done among various product options (colors, sizes, etc.) or among complementary products to boost perceived value and increase customer satisfaction. This clever sales approach allows you to offer a discount in a way that does not degrade your brand positioning or make your accounting journal entries more complex. As a bonus, bundling increases average order value, which brings in additional revenue even if it is not quite as profitable as selling them individually at full price.
Sell It at Off-Price
The longer inventory sits, the more likely it is to end up as obsolete. After 12 months (or once it reaches its expiration date) surplus inventory will need to be written off and taken as a loss. Selling excess inventory at a reduced price before this happens is typically a company’s last resort because it can cut so deeply into profit margins. However, most business owners can agree that getting something for your inventory is better than getting nothing.
Some kinds of inventory sell quickly directly to customers once their price has been reduced. Other kinds of inventory require a more strategic discounting approach, often times with the help of a third party seller. Consignment companies, liquidators, auction firms, and scrap dealers are all potential channels for getting rid of your inventory at a reduced price, but each will take their cut on top of the discounted sales price.
Use It as an Incentive
Surplus small ticket items can be used as incentives or rewards for taking certain actions like referring a friend, signing up for a mailing list, making your first purchase, or hitting a set spending threshold. Keep in mind, the accounting gets more complicated when using excess inventory in this way because these products are then classified as a marketing expense. However, it is a proven strategy for getting rid of low cost items and can actually help drive more profitable sales when used correctly, especially in a traditional retail setting.
Give It Away
For perishable inventory that is going to expire soon, giving it away for free is better than having it end up in a landfill. In either scenario your company will not reap any financial benefit but giving away stock that is nearing the end of its life to a charity can enrich the lives of those who receive it, create good will in the community, and provide a brand boost. Plus, the silver lining is that in some cases, the positive PR around a large charitable contribution of products can actually create a slight sales bump to lessen the financial hit that a company takes when writing off old inventory.
Get a handle on your bookkeeping by hiring a third party accounting services provider to manage inventory costs, depreciation, and write-offs.