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One of the main concerns of business leaders is excess inventory, as this can impact storage costs and negatively affect business growth.
That's why it's essential to understand what excess inventory is, the underlying causes, and strategies to avoid it.
If you work in a company with a turnover of more than USD10 million that is suffering from excess inventory and product, the best thing is to stop calculating the demand forecast and the purchasing process manually or in an excel and start using a inventory management and demand planning software.
Now, let's see what excess inventory is and how you can correct it.
To begin with, you need to understand what excess inventory is, in a nutshell is to have more products or raw materials in your warehouses, compared to what you should have in order to meet your current or future demand.
The main factors that can cause excess inventory are related to excessive purchasing decisions, deviations in your forecast or incorrect demand estimates, changes in market trends or problems in the supply chain.
Having excess stock is a problem for companies for several reasons:
Storage costs: having additional inventory levels involves storage costs, including space rental, insurance, maintenance, and other expenses associated with storing stock.
Decrease in cash flow: When you have excess inventory, you impact the company's cash flow, which can be used to generate more revenue and profitability.
Cost/Opportunity: the capital invested in inventory could have been used in other aspects of the business to generate higher returns, such as investments in research and development, marketing, or strategies for the company's growth and expansion.
obsolescence: products stored for a long time have a greater risk of becoming obsolete, especially in industries with short product lifecycles such as the perishable food industry or in sectors where technology where products change constantly and rapidly.
Risk of loss: a very important problem when we talk about excess stock is the risk of loss due to theft, damage or deterioration of products.
Management difficulties: Excessive inventory can make it difficult to effectively manage and control inventory levels, which can lead to a company having problems with tracking, accounting and planning.
Operational inefficiencies: Excess stock can hide underlying problems in the supply chain, such as long delivery times or production inefficiencies.
Loss of value: the value of stocks may depreciate over time due to changes in demand, technological advances or other reasons. If you have still capital that you are not taking advantage of, it will lose value over time.
Funding: maintaining excessive stock may require additional financing, increasing the company's financial costs in terms of interest and other financial burdens.
Management difficulties: managing excessive inventory levels can be complicated and lead to problems such as obsolescence, lack of inventory turnover, and the need for liquidation with promotional prices to get rid of the excess.
Environmental impact: Having an excess of stock can generate greater waste and consumption of resources, which can have a negative impact on the environment.
The key to avoiding overstocking in your company's warehouses is to know what the main causes are. Although these may vary depending on the industry and specific circumstances of each company.
Remember that in order to mitigate the effects of the main causes of excess inventory, it is necessary a comprehensive approach that includes more accurate demand planning, effective inventory policies, efficient supply chain management, and the ability to adapt quickly to changing market conditions.
One of the biggest causes of excess stock is inaccurate demand forecasts. Companies can overestimate the demand for your products or underestimate the speed with which customers will buy your products.
For this reason, more and more business leaders are deciding to rely on technological solutions, since these platforms of demand planning can achieve +95% accuracy in their projections.
Another cause of excess stock in a company is usually the production of large batches for generate operational efficiencies and reduce unit costs. The problem comes when sales are not achieved as expected, or when quality problems are discovered that require the retention or disposal of inventory.
In many companies, the proposal may arise to purchase quantities of products or raw materials that exceed real needs in a given period, generally motivated by overestimation of demand, lack of planning, poorly calculated offers and discounts, or fear of scarcity. Of course, this leads to overstocking.
It is also possible that problems in the supply chain, such as delays in the delivery of raw materials or components, can lead to stock accumulation as production continues uninterrupted.
The lack of clear and effective inventory management policies can lead to stock accumulation, either due to oversecurity or inadequate replenishment policies.
Promotions or discounts that do not generate the expected increase in sales may result in overstock of promotional products.
A lack of visibility can lead to poor planning and, as a result, to excessive inventory due to little coordination between different actors in the supply chain. That is why every company director must make sure to invest in tools that facilitate this management and provide him with wide visibility of what is happening.
Sudden changes in demand, whether due to seasonal factors, market trends, or unexpected events, can lead to excess inventory if the company doesn't quickly adjust its production and orders.
If you don't have a efficient inventory rotation system can lead to the accumulation of products that are not being sold quickly, generating excessive inventories.
Of course, there are a number of good practices for inventory management that go a long way in ensuring that there are no shortages or excesses.
Now that you know the importance of taking care of excess inventory and what causes it, It's time to share the most effective strategies that you can implement in your company to avoid this.
The first strategy to avoid overstocking in your company should always be to improve demand planning.
To do this, we recommend that you use more accurate and sophisticated forecasting techniques for forecast future demand for products more accurately. Remember that this is the input you will have to adjust your operations.
At this point, remember that you can include the analysis of historical sales and order data, market trends and the use of artificial intelligence models such as traditional machine learning or deep learning.
An effective alternative is to hire a demand planning and purchasing platform that helps you to centralize all data sources and with specialized models, they help you process your data and predict the results.
This is a fundamental strategy for optimizing your stock management and improving operational efficiency in your company.
The Just-in-Time (JIT) approach focuses on minimizing the need to maintain large inventories when receiving and use materials just at the time they are needed in the production process.
With this methodology, companies usually have benefits such as:
A strategy that should be central to your business is to establish more efficient inventory policies, such as the use of minimum and maximum inventory, optimal reorder levels and ABC inventory management techniques (classification of products according to their importance).
Improve communication and collaboration with suppliers and other supply chain partners for share information about demand, production plans, and inventory levels.
This can help you reduce uncertainty and minimize excess inventory.
We also recommend that you evaluate strategies that provide you with greater flexibility. Adopt more flexible manufacturing and ordering systems that allow for quick adjustments in production and the ability to place smaller and more frequent orders based on actual market demand.
Implement continuous stock monitoring systems is an indispensable strategy for any company that wants to quickly identify and address a case of excess inventory before it becomes a major problem.
It's a strategy that will not only help optimize inventory levels, cost reduction, operational efficiency and decision-making, but it's also a way to improve customer service, because it allows you to meet their expectations in terms of availability and delivery times.
Do not apply promotions or offers impulsively, be sure to carefully and strategically plan these initiatives, in order to avoid excess inventory. This can include dynamic pricing strategies, staggered product launches, and proactive stock management during peak sales seasons.
Periodically analyze your supply chain to identify potential points of congestion, bottlenecks or inefficiencies that may contribute to excess inventory, and thus take appropriate corrective measures. Remember that this will be much easier if you have specialized supply chain platforms or technologies.
If at this time you have identified that there is excess inventory, here are the steps that help companies in this situation:
Start by analyzing the current inventory, taking into account not only the quantity of products but also their monetary value.
Through this approach, you'll be able to have a clearer view of the magnitude of excess inventory and of the products that represent a higher cost. Then, you should buy both metrics and identify which items generate expensive excess inventory that doesn't translate into sales.
Now you'll need to divide your excess stock into 2 categories:
Evaluate the use of inventory management tools that allow you generate detailed reports regarding the sales of each product. The key is to rely on technology to improve the management of your company
Based on reports or with the support of advanced tools, you'll be able to quickly identify items with low sales levels to take corrective action.
Focus on the action, start with identify the best strategy to boost product sales that you have in excess.
To do this, you can take into account special promotions aimed at specific products, clearance sales, discounts or even, you can consider making donations to social organizations.
As we have seen throughout this article, excess inventory represents a problem for companies due to their associated costs, the risk of obsolescence and the loss of opportunities financial.
This means that having excessive inventory can be costly and problematic for a company, affecting its profitability, operational efficiency and ability to adapt to changes in the market.
It's important for companies to maintain an appropriate balance between available inventory and market demand to avoid these problems and maximize their profitability. For this, it will be key have specialized tools and technologies in inventory management, supply chain and/or demand forecasting.
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