Warehousing & Fulfillment

How to Manage and Prevent Excess Inventory

Warehousing & Fulfillment
December 5, 2022
8 min read

Excess inventory can drain margins and decrease efficiency in the supply chain. Learn how to streamline your supply chain and better manage your inventory.

From Supply Shortages to Excess Inventor

Excess inventory is plaguing retailers of all sizes, dragging down profitability and filling up warehouse shelves. According to Morgan Stanley, retailers currently have a 19% discrepancy between inventory levels and sales growth 

How We Got Here

Prior to the pandemic, just in time (JIT) was the preferred inventory strategy for most merchants. A JIT strategy keeps inventory carry costs low and margins high, but also comes with a high risk of stockouts.

Rolling stockouts in 2020 resulting from supply chain shutdowns and increased consumer spending, then prompted brands to pivot to a just in case (JIC) strategy, increasing their inventory levels to adjust for extended lead times and high demand.

Then, as pandemic restrictions eased, consumer spending patterns changed. Sales on previously high-velocity products slowed and forecasting became difficult.

At the same time, large 3PLs and major retailers snapped up all the warehouse space they could find. And supply chain shortages in construction extended timelines for the completion of new warehouse space.

Excess Inventory Management

Large retailers are taking one or more of three approaches to excess inventory management.

1. Moving excess inventory to deep storage

Retailers like the Gap and Kohl’s will move some basics and non-seasonal items into storage in hopes of selling them later when demand improves. The risk with storing excess inventory is in racking up long-term storage that may end up costing more than you could ever make back on a sale.

2. Offering deep discounts for the holidays

Amazon kicked off the holiday shopping season early this year with their second Prime Day. Many major retailers followed suit, rolling out Black Friday deals earlier and extending them longer. 

Retailers are using heavy discounts to drive demand in the face of inflation and hoping that strong holiday spending will clear out some excess inventory.

Similar tactics for managing excess inventory include offering buy one get one (BOGO) deals, kitting popular items together in discounted bundles, and offering mystery deals or grab bags of slow-moving items.

3. Liquidating

Other retailers are taking more decisive actions by liquidating excess inventory to clear up space on the shelves and create a more streamlined customer experience.

Target took aggressive measures to clear out excess inventory, which in the short-term hurt profits, but in the long-term, will allow them to replenish stock for in-demand categories.

What are the Effects of Excess Inventory?

Excess inventory is a drain on profitability and efficiency. Some results of carrying too much inventory for too long include:

1. Depleted margins 

Inventory carry costs can drag down the profitability of sales. Long-term storage rates add up and may eventually outweigh the return on an eventual sale.

2. Inventory shrinkage 

The more time products spend in storage or on the sales floor, the more likely they are to be damaged, lost or stolen.

3. Missed sales opportunities

Merchants and retailers have limited amounts of space. Aging or obsolete inventory takes up valuable space that could be used for storing new products that sell at a higher velocity.

4. Decreased working capital 

Inventory is a major investment, and every item that’s sitting on a shelf represents capital that could be invested back into other areas of the business.

Understanding Risk Tolerance

Ultimately, there are risks associated with carrying either too much or too little inventory. Every merchant must decide their risk tolerance to find the correct balance for their business.

Higher risk inventory management

Businesses with a higher risk tolerance will run a leaner supply chain and carry less inventory. They run a greater risk of stockouts and missed sales opportunities but will realize higher margins per sale.

Lower risk inventory management 

Businesses with a lower risk tolerance will carry higher levels of inventory. They will have a lower chance of stocking out, but they will realize lower margins on sales.

How to balance risk

In order to find your risk tolerance and strike the right balance for your business, Harvard Business Review recommends evaluating risk at the SKU level based on the following criteria:

1. Sales volatility

The more unpredictable demand, the higher the likelihood of stockouts. Looking at seasonal patterns of demand will lead to more detailed forecasting.

2. Profit margin

Higher profit margin yields higher risk because each missed sales opportunity represents a greater loss. You may want to take a more conservative approach managing high margin SKUs.

3. Sales volume

Higher volumes equate to lower risk because each missed sales opportunity has less impact on overall margin. These SKUs may be right for a high-risk inventory management tactic.

How to Prevent Excess Inventory

After dealing with the effects of excess inventory, many merchants are taking a critical look at their end-to-end supply chain to prevent the buildup of slow-moving products in the future.

Demand Forecasting

Merchants of all sizes should take a critical look at their demand forecasting methods. A mature demand forecast will include not only historical sales data but industry trends as well as marketing and promotional schedules.

Merchants should also have an understanding of where their inventory should be staged in order to offer the best, most affordable shipping options to their customers. Distributing inventory closer to end customers lowers time in transit (TNT) to control delivery costs and optimize customer experience.

SKU Prioritization

As merchants revisit their procurement strategy, many are asking if they should return to a JIT vs JIC supply chain. However, the real question may be, which SKUs are driving the profitability of your business and should therefore be prioritized.

When you look at your top sellers at the SKU level, you may be surprised to learn that, within your top-moving product line, only one of four colorways is selling at a profitable rate. Deprioritizing the slower-moving colors will allow you to increase volume of the fast-moving SKU for better margins and a more streamlined supply chain.

Accessing Your Supply Chain Data

Partnering with a technology-first supply chain partner will give you access to supply chain and fulfillment data that will drive more informed decisions to prevent issues like excess inventory. 

Best-in-class fulfillment technology will aggregate Warehouse Management (WMS), Transportation Management (TMS), and Order Management (OMS) data into high-level reporting that is easy to understand and offers actionable insights for your business.

Looking for a partner to help you simplify your supply chain to drive more profitability in your business? Take a look at Ware2Go’s end-to-end solution today.

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