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What is Excess Inventory & How Do You Manage It For Profits?
When ships take on water during a storm, the crew throws heavy, non-essential items overboard. This lightens the boat, so it doesn’t sink. It’s a tough call for the captain, but ultimately, survival is a top priority.
Many direct-to-consumer brands find themselves in the same boat. The source of the storm might be pressure from suppliers to order more than enough inventory or fear of an upcoming shortage.
But if there are any market fluctuations, brands need to jettison their excess inventory to save their crews. After all, even retail giants like Walmart sink a bit when their inventory levels are too high.
Luckily, you keep your retail operations smooth sailing by getting ahead of excess inventory.
Excess inventory is the surplus stock retailers have on hand. Unlike safety stock, extra inventory isn’t a strategic buffer against stockouts.
Excess stock happens when the goods ordered don’t sell as quickly as planned.
More quantifiably, you have too much inventory on hand (AKA, excess inventory) when the product’s potential value minus storage costs are less than its salvage value. Meaning, you won’t make a profit, even if that good sells.
Excess inventory is a common issue that every retailer faces at some point.
For instance, adverse weather or natural disasters, long lead times, supplier issues, poor marketing, and DTC trends ending can all impact how long an item sits on your shelf.
But lately, brands have been intentionally overstocking. Casey Armstrong, Chief Marketing Officer at ShipBob, even notes in Beauty Independent:
“To stave off supply chain problems, indie beauty brands are trying to place bigger purchase orders, but they risk being stuck with inventory they can't use.
This strategy (if we’re calling it that) puts your business’ financial health at risk because when excess inventory officially becomes “unsellable,” it turns into dead stock (RIP).
At that point, it doesn’t matter if the cause of “death” is expiring, rotting, going totally out of style, or otherwise not budging. That obsolescence will be an expensive problem to get rid of.
First, go into your stockroom, warehouse, or garage. Can you walk through the space without a box falling on your head? If not, you have way too much inventory on hand.
We’re kidding! (Well, mostly.)
There’s a simple, mathematical way to determine if you have too much inventory on hand. Here’s what you do:
To calculate your inventory turnover rate, use the following formula:
| inventory turnover rate = costs of goods sold / average inventory value = number of units sold / average number of units on hand |
Here’s an example: Let’s say your COGS sit around $40K for the past 12 months. And usual stock on hand during that time costs $10,000.
(In other words, you have $5,000 worth of product inventory at any given time.)
By dividing $40K by $10,000, we get an inventory turnover rate of 4. This means that your inventory sold through ~4 times last year.
Though this rate will differ based on your vertical, customer base, suppliers, marketing team, and so on, an ideal turnover rate typically sits between 2-4.
Less than 2 means you have too much dead stock on hand. And anything more than 4 indicates you’re at risk of a stockout.
Once you know your inventory turnover rate, you can start evaluating the health of your inventory on hand.
Say your inventory turnover rate is high (like 10-15). That puts your turnover rate on par with high-volume retailers like grocery stores.
So, a high inventory turnover rate won’t necessarily signal bad news if you sell goods with an expiration date. But it also comes with its challenges.
High-volume retailers typically sell seasonal or perishable products that need to move their stock quickly – before they expire or go out of style.
Because of this, these retailers have little safety stock to buffer supply chain disruptions or sudden changes in demand.
But for most ecommerce stores, if you’re turning over products at a rate of 10 or more, you’re wildly understocked. So, you’ll likely want to order more inventory to avoid going out of stock and losing sales.
However, if your turnover rate is syrup-slow, like 1-2, you’re basically keeping products for 6-12 months before they go anywhere. This can happen when you are massively overstocked.
In this case, your next purchase order (PO) likely doesn’t need to be as big as you think.
This frees up more working capital to invest in other growth initiatives (like launching a new product) or weather unexpected challenges (like a recession).
Using your inventory turnover rate, you can also calculate your inventory days on hand (the number of days it takes to turn over your inventory).
This inventory management KPI can help visualize your ordering efficiency.
To calculate your inventory days on hand, use the following formula
| inventory days on hand = 365 days / turnover rate |
Let’s go back to our example in Step 1, where our inventory turnover rate was 4. When you divide 365 by 4, you get ~91 days on hand.
Generally speaking, the longer items sit in your warehouse (or the higher their days on hand), the more likely they will become obsolete and lose value.
By routinely recalculating this inventory management KPI, you prevent overstocking and keep inventory costs low.
While inventory excess is largely considered bad, the good news is it’s usually caused by 1 of 3 common causes:
Calculated your inventory turnover rate and realized it’s not what it should be?
You’re not alone – the US Census Bureau found that most US retailers hold about $1.26 in inventory for every $1 of sales as of April 2022.
This means most brands carry more stock than they need. And a majority of the time, it’s due to inaccurate demand forecasting.
For example, it’s easy for human error to mess up a manual demand forecasting process.
Sometimes, retailers manage dozens or even hundreds of spreadsheets simultaneously without connecting those data sources. Meaning, the numbers in 1 sheet may not match another.
Even worse, 43% of small businesses don’t even bother tracking their inventory data or forecasting demand (manually or with inventory forecasting software). Naturally, this turns restocking into a gamble.
We won’t be shy here: We created Cogsy to save retailers from being blindsided by the impacts of inaccurate demand forecasting.
You deserve to have inventory control throughout your supply chain to the fulfillment process.
And you also deserve to place purchase orders without crossing your fingers, wondering if you’re ordering optimal quantities. (But more on all that later.)
Most retailers don’t know something isn’t working… until it really isn’t working.
The average retailer has an inventory accuracy of about 63%. Meaning, they failed to track what happened to a big chunk of the stock correctly.
IHL group even found that retailers have lost $1.1T in revenue due to inventory distortion over time — which they point out is the GDP of the entire country of Australia.
Because of the untidy data issues outlined above and without the right tools to help, conducting inventory audits is so time-consuming that it doesn’t seem worth it. So, most business owners don’t run them as often as needed.
In fact, The Academy of Executive Management reports that the main reason operators skip auditing is a lack of effective reporting and inventory management systems:
“Often a company does not recognize that they have excess inventory because the management reporting system (usually a part of the accounting system) does not adequately identify where and how much excess inventory exists.
If you don’t know your turnover rate, you’ll likely only discover an excess inventory problem after diving deep into your inventory data.
But by then, your best chances for turning that inventory into revenue may be behind you.
Sometimes, it’s not you; it’s them (AKA, anyone along your supply chain).
For instance, vendors can persuade you to over-order.
Longer purchase order lead times can make you second guess when to place orders. But perhaps most notable is supplier minimum order quantities.
Minimum order quantities require you to purchase a certain number of units on every purchase order – even if you don’t need that much. This protects your supplier’s bottom line.
(You can always try negotiating better contract terms to lower your MOQ. However, most suppliers won’t go for this.)
Suppliers might also offer special wholesale discounts or early seasonal buys that motivate you to hit “order” earlier than needed.
Why? Because scarcity marketing tactics work. Especially the case after the widespread impacts of COVID-19 added more supply chain slowdowns.
(Your customers aren’t the only people making impulse purchases!)
But that’s where your demand forecasts come in. Those projections (combined with your current inventory levels) should answer: what do you actually need to order and when?
Sticking to that operational plan will keep you from accumulating excess inventory.
Isn’t having extra product on hand “just in case” a good thing? For retailers, excess inventory has a few positives. But ultimately, there are more detractors, making it something your business should avoid.
Let’s walk through a few of each.
A full warehouse can be a huge advantage during times of crisis (like a pandemic). That’s because it provides you with some extra buffer when supply chains slow.
Your ops team might not love excess inventory, but your marketers sure do! The more inventory you have, the more aggressively they can run campaigns that increase demand.
Plus, during high-demand periods like Black Friday, they can do it without worrying about seasonal stockouts.
Pandemic disruptions taught consumers to lower their “gotta have it now” overnight shipping expectations. But overall, customers still expect products to be delivered quickly.
With excess inventory, you run a better chance of getting a product into your customers’ hands faster, leading to higher customer satisfaction.
If you’re stocked to maximum capacity, you don’t have to be as dependent on suppliers’ timelines. And this can be a boon, considering how much order lead times fluctuate.
You’ll also have less back-and-forth communication coordinating shipments because you’re restocking less frequently.
Despite the handiness of the points above, the disadvantages of excess inventory far outweigh the benefits. Here’s why.
More inventory, more problems. Storing excess inventory incurs tons of extra carrying costs, similar to added interest on maxed-out credit cards.
To protect this product, you’ll pay for ongoing storage, facility upkeep, security, and (possibly) additional staff.
Not to mention the insurance required to protect all of that product just sitting there! And the slower this stock moves, the more expensive it gets.
Then, the unthinkable can happen: You might even max out your storage capacity, leaving no room to store products your customers actually want.
(That is especially risky considering the widespread warehouse shortage issues lately.)
Plus, the more stock you have sitting in a facility, the more exposed you are to inventory risks like natural disasters or theft.
There’s a reason you don’t keep all your money in gold bars on your closet shelves — it’s more vulnerable and exposed that way.
Your business capital — especially when it’s tied up in inventory — is the same way.
This is the big one: Excess inventory locks up cash that could otherwise be used to grow your business.
You need as much capital available as possible at any given time because that’s actual business security — not a full warehouse.
That’s because capital is flexible; excess inventory is not. You can’t buy advertising space with inventory. Nor can you pay seasonal workers or order new products with inventory!
So, despite popular belief, intentionally holding excess inventory rarely creates more security in your business.
If anything, excess puts your business at higher risk of running out of capital (the #1 reason brands went out of business in 2021, BTW).
Excess inventory might seem beneficial to the customer experience — I mean, isn’t being in stock what customers want? Not if you always sell the exact same thing.
When this happens, you’re more likely to bore your customers, leaving them with little incentive to shop from your brand again.
There’s a scientific reason for this: dopamine. Dopamine drives us to seek new experiences (or, when it comes to your brand, new products).
So, the more product variety you can offer, the more dopamine rushes you’ll create for customers and the happier they’ll be.
However, you can’t offer this variety if excess inventory ties up working capital.
That’s because, without working capital, you can’t bring new products to life or run engaging marketing campaigns.
As I mentioned earlier, when excess inventory finally sells, it’s at a loss (or, at minimum, much lower profit margins).
How so? Because the holding costs plus cost of goods sold (COGS) for the stale inventory end up higher than your profit margins. So, your balance sheet isn’t pretty.
This can be devastating for brands operating on venture capital, especially when your investors like to see upwards-trending charts at quarterly board meetings (what investors don’t?).
In fact, Saravanan Kesavan and Vidya Mani from UNC’s Kenan Institute of Private Enterprise found that excess inventory leads to poor stock returns. Meaning, your excess inventory could (if bad enough) impact your market value, too.
Luckily, the duo also found that adding abnormal inventory growth into your forecasts can improve the forecasts’ accuracy “as much as 15.08% for the over-inventoried retailer.”
This makes it easier to shed surplus inventory and recover financially.
Excess inventory will naturally lead to some excess waste. After all, the more stock you have on hand, the harder it is to sell or give it away.
And how you give it away (especially if you’re just throwing it away) could damage your brand’s reputation.
After all, people don’t want to buy from companies that clash with their values – especially not when it comes to the environment or fair labor practices.
Take Burberry, for example. The luxury fashion brand infamously came under fire when news leaked that they burned $36.8m of excess inventory in 2017. But they’re not the only ones to do this.
Burberry has since publicly committed to ending this practice.
But fast-fashion retailers (the biggest offenders of excess inventory) are still dumping excess inventory in places like the Chilean Atacama Desert. (At a rate of almost 40k+ tons per year.)
Consumer behaviors change rapidly. The pandemic was proof of this, increasing online spending by an unprecedented 35% year-over-year bump. And a looming pandemic is once again catalyzing changes in consumer spending habits.
Excess inventory slows down how fast you can respond to these changes. After all, how can you quickly pivot to meet demand when you’re stuck selling products no one wants?
So, when fads like Beanie Babies and fidget spinners come and go, they need to come and go from your storage facilities too.
Otherwise, you’ll get stuck holding passé products. And you won’t have the storage space or capital to provide products your customers actually want.
The best thing you can do is avoid excess inventory in the first place (you can do this with an ops optimization tool like Cogsy).
But if you already have excess inventory collecting dust, don’t panic! Here’s how you can turn that inventory into profit.
Plan ahead for merchandising do-overs. Retail consultant Chris Guillot says to anticipate needing to re-merchandise new products relatively soon after launch (usually around the 2- or 3-week mark).
Yes, that soon!
Remember that “inventory turnover days” number you calculated? You don’t want to discover that it takes several months to turn over your inventory the next time you run an audit.
So, by making remerchandising part of your replenishment process, that 2nd wave of marketing needed to expedite turnover won’t come as a surprise. You’ll have already planned for it.
Running a sale is a classic way to increase consumer demand and eliminate dead inventory.
Some retailers wisely build post-holiday sales into their marketing calendars to get rid of seasonal leftovers.
(Consider leaning on your historical sales trends to plan promotions following periods of high demand.)
Meanwhile, other retailers will run seemingly spontaneous flash sales.
For the customer, these sales are a fun surprise. But for retailers, it’s a great tactic to rush excess inventory out the door before it becomes dead stock or accrues expensive holding costs.
For example, kids clothing brand Scout & Co sold its Mini Rodini product line at a 30% discount heading into the 2022 spring season.
By only discounting 1 product line, the retailer risked turning off parents who aren’t interested in that label. But they also made the sale more enticing for parents who love the line, making it more likely they’d sell through the excess inventory.
If you follow this approach, it might make sense to segment your audience for folks previously interested in the discounted line.
You’ll also want to get strategic about when you run sales, so customers don’t grow accustomed to your slashed prices.
Instead of using discounts as a reactive tactic, use an operational planning tool to proactively build these promotions into your remerchandising strategy. That way, your team can prepare rather than scramble to keep up.
If a product isn’t moving, it might be because customers can’t contextualize what they’d use it for. Or people might not think the product is “worth it” on its own.
By adding that extra inventory on hand to a product bundle, you can boost sales. That’s because bundles help move low-turnover items by pairing them with higher-selling SKUs.
For instance, online home paint retailer Backdrop might not make big bucks selling roller extension kits.
But they can suggest the product at checkout when a customer is purchasing paint, along with educational info about why they’d need that recommended product.
| 🤿 Dive deeper: Caraway’s bundling playbook. |
Giveaways are an ace-in-the-hole marketing tactic for moving less-than-fresh inventory.
But it’s also proven to improve your customers’ experience and increase brand loyalty.
Nearly 90% of people who received a free gift from an ecommerce retailer said they were “somewhat likely” to buy more frequently.
Plus, partnering with other companies for grouped giveaways can open up new audiences for your brand.
You can give away excess inventory as a thank-you for purchases, too. Freebies at checkout can help you move old products and decrease the likelihood of an abandoned cart.
For example, sunscreen brand Super Goop gives every customer 2 free samples (of their choice) at checkout to close the conversion.
But to celebrate the 4th of July 2022, customers got a free mini tube of Glowscreen with every purchase (some added sunshine without offering a deep discount).
Sometimes, no matter how brilliant your marketing or bundling tactics are, your customers just lose interest in a product.
When that happens, it might be time to cut your losses. But no need to dump that excess product in a desert (please don’t!).
Instead, give back to your community by donating products to a well-suited charity. You may even find added tax benefits in your donation!
Though generosity is a lovely act, donating goods isn’t always sustainable or possible from a business viability standpoint.
Even retail businesses that created operational plans centered around presenting inventory, like TOMS Shoes, are beginning to step back from that strategy.
So, avoid factoring these donations into your inventory planning.
Even if you follow all these steps above, it’s not always guaranteed that you’ll be able to distribute your products to the right organization at the right time. And you may have to throw away that dead stock after all.
So, the best thing you can do to eliminate excess inventory is to create as little of it as possible in the first place!
There are a few ways to avoid excess inventory in the first place, like conducting routine audits, improving demand forecasting, and placing smaller purchase orders for new products.
Plan ahead by scheduling regular inventory audits to check for phantom inventory, or excess units that aren’t reported in your inventory levels.
For one, audits are an important habit to build as a business operator.
But even better, cleaning up your data improves your inventory accuracy and helps your forecasting software work better.
You don’t have to block off a whole day on your calendar and put everything on hold to audit your inventory. Instead, conduct spot checks of 1-2 SKUs each week until you’ve gone through your entire inventory. Then, rinse and repeat.
If a pattern emerges, like excess stock or shrinkage, conduct a deeper audit focused on that issue to identify what’s happening.
You need to check historical sales data against current inventory trends to anticipate future customer demand.
Sounds so easy, right? But it’s not always, especially when you have to spend tons of time analyzing past data to make the most accurate predictions possible.
Sifting through SKUs at this granular level can take hours, if not weeks, to do correctly. And that’s assuming you make no mistakes and love working all weekend on data dives.
If you have analyzed historical data and real-time inventory visibility, your forecast will reflect your current inventory needs. Not what you needed months ago.
When forecasting demand for new products, you won’t have historical data to lean on. So accurately placing your first order without creating excess inventory can be tricky.
Treat new products as experiments, even if you’re confident that your customers want them based on surveys and sales conversations. Meaning, don’t go all-in. Instead, test out a smaller batch first to verify that your customers want it.
Then, once you’ve proven there’s demand for the new item, you can confidently order more without the risk of collecting excess inventory.
Your best bet for reducing excess inventory is removing the possibility of human error in your ordering and planning process through inventory optimization.
After all, a slip of a finger on a keyboard can turn a 10 into a 100 and be near-impossible to catch.
An inventory optimization like Cogsy prevents these easy (and costly) mistakes by seamlessly integrating with the tools you already use.
That way, you get a single source of truth into your inventory needs and always order the right amount of inventory.
Say goodbye to excess inventory with Cogsy.
Cogsy keeps a 24/7 eye on your inventory data and turns it into actionable insights. For instance, use Cogsy to:
But no need to take our word for it – try Cogsy free for 14 days.
How much inventory you should have depends on your industry, products, customer behavior, suppliers, and lead times. However, retailers generally have enough stock if their inventory turnover ratio is between 2-4.
Excess inventory must be stored until it sells, making it an expensive problem. However, the longer inventory goes unsold, the more likely it will turn into dead stock. When that happens, retailers must devise a strategy to eliminate or throw obsolete inventory away.
It’s bad to have too much inventory because it invests capital in products that won’t turn a profit. This tied-up capital makes it difficult, if not impossible, for brands to grow and puts the business at financial risk.
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