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What is Excess Inventory?

Excess inventory is the general term used in reference to unsold items sitting in inventory because, for whatever reason, demand for them has fallen short of your current supply.

There are several common reasons for an overstock situation, find out what you can do if you have too much inventory on hand.

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Common Causes of Too Much Inventory

Overestimating demand is relatively common, especially for a new item for which there is no sales history to rely on. Many smaller businesses have not invested in demand planning software or other tools to prevent inaccurate demand forecasting. Manual inventory control presents numerous opportunities for error. Consequently, a business can end up with either too much or too little of a particular item.

Seasonal changes in demand can also cause excess inventory. Businesses don’t always know which items experience seasonal demand fluctuations or to what extent demand can change with the seasons. Additionally, they may not know when to order seasonal items so they arrive in time to meet an upswing in demand. Even if they do, delays in shipping can cause deliveries to miss the window for meeting seasonal demand.

Supply chain problems have been commonplace since Covid-19 caused disruptions. Fuel shortages caused by political events in different parts of the world also can contribute to shipping delays. Some companies may order more frequently in an attempt to maintain sufficient supply despite shipping uncertainties—a strategy that can backfire and result in excess inventory.

Product life cycles must also be taken into account in inventory management. The demand for new products typically is highest when they first are introduced to the market. Demand remains high for a while, but ultimately declines as products mature. Business owners must be able to tell when demand for a product has reached its peak and scale back future orders accordingly.

Manufacturers are particularly vulnerable to ending up with excess inventory due to order cancellations from the companies they do business with.

All businesses that maintain merchandise in inventory can experience a sudden drop in demand because of the overall economic environment. For example, high inflation typically causes prices to increase, which can cause consumers to cut back on their spending and wait for prices to come down. Demand for many types of goods also falls when recession fears are running high.

Why Not Wait for Demand to Increase?

Some might argue that it makes sense to hang onto overstock items so as to be well-stocked when demand increases. Perhaps, if you knew for sure that demand would pick up within a reasonable period of time, and if holding on to excess inventory did not create any problems. Unfortunately, it can and it does.

Consequences of Holding Excess Inventory

Perhaps the strongest case to be made against holding on to overstock items is the amount of capital tied up in it. There is no return on your investment in merchandise until it sells. The amount of money you spent to acquire the inventory that is not selling well can be enough to adversely affect your business’s cash flow and your ability to make other capital investments. In addition to not having access to the cash tied up in it, excess inventory also increases storage costs.

Unlike fine wine, most goods don’t improve with age. The longer they are stored, the more they are likely to deteriorate, and the less they are worth if you can manage to sell them. Products that don’t decline in quality may very well become obsolete while held as excess inventory.

Clearly, there are plenty of good reasons to avoid getting stuck with excess inventory in the first place and to clear it out if you do.