Stocking the correct amount of inventory can be a challenging task for many retail store owners. If you overstock, then you’re left with costly excess inventory. On the other hand, if you understock, you miss out on sales.
Over half of small businesses use offline inventory tools or no inventory tools at all. This leaves you at a high risk for overstocking.
So how do you make informed decisions when it comes to stocking your store?
Knowing how much to stock can be determined through a honed approach to inventory management and sales data. Without this type of informed decision making, the effects on your productivity and profitability are costly.
Below, we share the seven main causes of overstocking and a variety of ways you can avoid it.
Table of Contents
- What is overstocking?
- What causes overstocking?
- What are theeffects of overstocking?
- How can overstocking inventory be prevented?
What is overstocking?
Overstocking,also called"surplus stock," happens when stores purchase more product than they sell.
Over-ordering inventoryleaves retailers with too much stock, and that excess stock is leftsitting on store shelves or in the warehouse, which can hurt profitability.
What causes overstocking?
Overstocking has many causes, but thankfully, nearly all of them can be mitigated through more careful calculation, planning, and analysis of your inventory.
The most common causes of overstocking inventory include:
1. Misjudged customer demand
Many retailers are facing aninformation deficit when it comes to their customers’ behavior, especially with COVID-19 limiting in-store purchases, which makes demand planning incredibly difficult.
Not being able to answer questions like “Who is our customer?” and “Are they a repeat customer?” means many retailers are flying blind when it comes to maintaining inventory.
As a store owner, if you can’t differentiate new versus repeat customers and their purchases, there’s a massive hole in your data for when it comes to stocking.
Misjudging your customer’s demand for your products can then lead to costly surplus stockthat's stuck on your shelves, taking up spacethat could be used for new products and sales opportunities.
2. Fear of “out-of-stock”
Out-of-stocks (OOS), or stockouts, are feared for good reason.Theycostretailers $1 trillion every year.
When stores have stockouts, or when they're low on inventory due to shortages,the impact is compounding. Not only is there a lost opportunity for revenue, there are also long-term costs, like frustrated customers, impact on brand reputation, and the high price of rushing replacement goods.
"Stockouts cost retailers $1 trillion every year."
That said, retailers need to be careful not to swing too far in the opposite direction.
In fact, overcorrection from OOS to overstocking is one of the primary causes of surplus goods. Both are costly and both are avoidable when store owners maintain a baseline of inventory best practices, which we’ll discuss shortly.
3. Ineffective promotional marketing
Marketing can be a powerful tool for engaging customers and promoting your business. But when store owners rely too heavily on marketing alone to push products, it can lead to trouble.
If you buy a large quantity of goods from your vendors, don’t assume your customers will want to buy it just because you set up a compelling marketing campaign. This is how retailers can find themselves with unfortunate excess inventory.
Customer behavior and previous sales data should drive your purchase decisions with your vendors. Guesses and assumptions should not. Otherwise you may find your store with a surplus of immovable goods on your shelves.
4. Poor inventory management
Focusing on inventory and in-stock items is fundamental to running a brick-and-mortar retail business.
Inventory costs should also be top of mind when considering how to successfully mitigate overstocking. Unfortunately, a lack of insight into these important inventory management aspects is another cause of excess stock.
The three main types of inventory costs are purchasing costs, shortage costs, and carrying costs.
Carrying costs are the expenses related to holding or storing your inventory. This can include the labor salaries, the shipping, the opportunity cost, the warehousing or storage, and the loss due to depreciation over time–all of which impact your break even point.
If you don’t know what these costs are, then you’re acquiring new inventory without accurate data showing your profit margins and cost of goods sold. This information is key to beginning proper inventory management and avoiding overstocking.
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5. Seasonality
Nearly all industries are affected by some type of seasonality, whether it’s Christmas—a great example of theimpact of seasonality in retail—tax season for financial industries, or even planting versus harvest times for green industry businesses.
The question is, do you know which ones affect your store—and are you anticipating seasonal buying impacts when it comes to stocking?
Retail stores that are unprepared, not strategically pricing during seasonal buying windows, and not leveraging multiple channels to promote and sell products during these profitable times will be left with high volumes of overstock.
6. Compensating for supply chain issues
Supply chain disruptions are all too common right now. Manufacturers, vendors, stores, and consumers alike are affected by the impact the COVID pandemic is having on supply chains worldwide.
New research by the McKinsey Global Institute details the costs of various supply chain disruptors and the landscape of interconnected supply chain networks in 2020.
Retail stores can be tempted to provision for supply chain inconsistencies by overbuying, which leads to costly overstock. And while maintaining on-shelf availability is also a challenge, it’s important to have data tools readily available to gather insights from your POS.
These analytics should inform how you compensate for supply chain delays and help your in-store teams make decisions to avoid overstocking.
7. Industry-specific challenges
Depending on your industry, your retail store may face unique overstock challenges.
Fashion and apparel
Overstock clothing is an ongoing problem for stores faced with forecasting demand for seasonal trends, and buying the incorrect distribution of clothing sizes is hard to avoid when many distributors’ default is to sell equal amounts of each size.
Your customer sales data may show that you sell 50% of clothing in medium sizes, 30% in large sizes, and 20% in all other sizes combined.
Working with your distributor to adjust size quantities and forecasting sales based on historical sales data is key to mitigating excessive stock.
Perishable goods
Retail stores that stock primarily perishable goods face a different challenge when it comes to avoiding overstock. The limited shelf life of products like prepackaged food, candles, shampoos, and pet products makes getting rid of excessive quantities before they expire and become unsafe a time-sensitive problem.
Learning to forecast demand for perishable goods is even more critical for profitability as the opportunity for selling discounted overstock items is limited.
What are theeffects of overstocking?
Regardless of the cause,overstocking inventory can cause some serious (and costly) problems for your retail store.
After all, when surplus stock is taking up precious time and resources in your retail store, you are losing both productivity and profitability.
So, what are the main problems caused by overstocking inventory?
1. Storage costs
The most immediate and visible impact of stocking more than enough product is the cost of storage and space.
By taking up shelving or back-of-store stockroom space, overstock prevents the placement of products that could sell. This is a lost opportunity cost that can be hard to recoup as the need to expedite the sale of overstock goods often requires more time and energy, deeper discounts, and increased expenditure.
💡PRO TIP:Ship-to-customer order fulfillmentis the easiest way to carry less stock in-store and dedicate more store space to displaying products. Rather than being limited to selling products you have in stock, you can sell products in-store and ship them to customers from your warehouse or another store location that has inventory.
2. Tied-up cash
Additionally, there is cash tied up in purchasing goods that become overstock. And until products sell, that investment will not be recovered.
This begins to snowball as store owners lack the funds needed to replace overstock goods with new products and prevents new product releases that could be profitable.
3. Product expiration
Finally, in the case of perishable and time-sensitive goods, overstocking means risking expiration and product obsolescence.
In this case, the opportunity to sell overstocked items is limited and time is of the essence. This further pressures retailers to sell their products at below-margin prices simply to free up resources.
But these are just the most immediate effects of overstocking.
The downstream impact includes additional spending on labor and personnel salaries, time spent repositioning products, the cost of transshipment or transportation of goods or delivery, and the loss of your profit margin.
How can overstocking inventory be prevented?
Avoiding overstocksandstockouts boils down to inventory management. At the root of all overstocking is blind order placing without an understanding of your store’s inventory.
With accurate demand predictions through POS data and customer behavior insights, you can minimize both the cause and effect of overstocking on your business.
Consider following thesefive tips for reducing your risk of overstocking and implementing better stocking practices.
1. Invest in inventory management software
For many retail stores, inventory management software that can do a lot of the data tracking, analysis, and calculations for you is a value add.
Nearly 43% of small businesses either don’t track inventory at all or use manual tracking methods. Yet, there are affordable software options available to help you better understand what, when, and how much product you need to avoid overstocking.
"Nearly 43% of small businesses either don’t track inventory at all or use manual tracking methods."
When evaluating inventory management systems, think about the KPIs and metrics you want to begin tracking. Make sure the platform you select aligns with your goals so you have a scalable solution for your business.
Unify your inventory management with Shopify
Only Shopify POS helps you manage warehouse and retail store inventory from the same back office. Shopify automatically syncs stock quantities as you receive, sell, return, or exchange products online or in store—no manual reconciling necessary.
2. Track sales with a POS system
Consider what point-of-sale (POS) system you’re using and ifit's tracking the data that’s most valuable to help you make purchasing decisions.
POS data tools should enable quick, accessible information like type of sales, customer profiles, product categories, quantities remaining, and even product reorder point alerts.
POS systems like Shopify POScome withadvanced sales tracking andinventory management reports to takethe guesswork out of purchasing and help you restock productseasier.
3. Use ABC analysis
Leveraging the power of ABC (Always Better Control) analysis can help retail stores arrange inventory from most to least important. ABC analysis is based on the 80/20 rule that 20% of your products contribute to 80% of your revenue.
- A = Items that are the highest priority. These items sell the best and are the most profitable inventory for your store. They are your focus for selling and restocking and have the most influence in your inventorycycle counting.
- B = Items that are of medium priority. They sell consistently well and are ordered on a regular, less frequent cadence.
- C = Items that are lowest priority and are often stocked in high quantities to avoid frequent reordering.
This type of hierarchical categorization is a great way for store owners to optimize storage space and streamline processes so the focus is on Category A items that are going to be the most profitable for the business.
4. Assess economic and market trends
Keeping a pulse on both economic and market trends is an important part of anticipating supply chain fluctuations in order to reduce your risk of overstocking. There are ways of knowing what is going to influence your demand so you can prepare accordingly.
Google Trends is a great tool for helping retailers gauge product interest over time and also offers other metrics that can assist in accurately stocking products.
Consider what data would help you better forecast demand and improve inventory purchasing and stocking. Then use Google Trends to search the topics and queries that can inform your decision making.
Using these trends and other data tools you have available, consider drafting an open-to-buy (OTB) plan for your store. This type of plan is great for eliminating the guesswork of purchasing, using a formulaic approach to stocking.
Learn more about how to use Google Trends to help run your retail business.
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5. Audit your inventory regularly
Lastly, conduct regularly scheduled inventory audits. A successful audit involves knowing how you measure up to your key performance indicators, or KPIs. So, step one is establishing goals for your inventory management.
Data that may be most helpful for establishing KPIs for inventory management include:
- Cycle time: the amount of time from product manufacturing to sale
- Inventory turnover rate: how quickly you’re selling and replenishing products
- Inventory count: total amount of inventory (divided into ABC groupings)
- Order fulfillment time: amount of time it takes from product fulfillment to sale/delivery
Also think about these inventory metrics that can show you what your inventory is costing you:
- Gross margin return on investment (GMROI): Gross Margin / Average Inventory Cost
- Sell through rate: (Quantity Sold / Original Quantity Available) x 100
- Inventory Carrying Cost: Sum of all costs for unsold inventory ≤ 30% of inventory’s value
- Inventory-to-sales ratio: Available Inventory for Sale / Quantity Sold
These KPIs and metrics provide a fuller picture of your inventory, what products are working for you and what products are taking away from your business profitability.
This is going to help you refine what you should be restocking most frequently and what products, processes and other elements of your inventory structure are contributing to an overstock issue.
FURTHER READING: Another option for combatting overstocking is to adopt a just-in-time inventory system. Read our blog to learn more about this inventory strategy.
Why overstocking is really a data value issue
By now, it might seem like overstocking is a matter of what data you have available. And while that is the first step to gaining insight into how your business is run from an inventory perspective, the key is having the right data value structure in place so your store can stock successfully time after time.
It’s not just more data, more alerts, more tracking, more sales insights. It’s the right data, right alerts, right tracking, and right sales insights.
"It’s not just more data, more alerts, more tracking, more sales insights. It’s the right data, right alerts, right tracking, and right sales insights."
The key to successful inventory management that avoids overstocking is leveraging available tools to help streamline your stocking and help you make informed decisions when it comes to purchasing from vendors and manufacturing.
Want to learn how other businesses manage their inventory to avoid overstocking?
Learn how Greenery Unlimitedfigured out how to manage their complex, ever-changing inventory of live plants.
Read their story
Product overstocking FAQ
What overstocking means?
Overstocking is when you have more inventory than you can sell. This can tie up your cash and prevent you from being able to invest in other areas of your business. Overstocking can also lead to spoilage if you have perishable items.
What are the effects of overstocking?
Overstocking products can lead to increased levels of inventory in store and in warehouse. You risk product being expired or trouble selling later if there is reduced demand.
Is it better to be overstocked or understocked?
It is better to be overstocked than understocked because it is easier to sell more of a product than it is to find more of a product.
How do you manage overstocking?
- Donate the excess inventory to a local charity or organization.
- Sell the excess inventory at a discount.
- Return the excess inventory to the supplier.
FAQs
What are the consequences of overstocking and understocking? ›
Overstock tied up your cash for unnecessary stocks and increased operating, holding, and inventory storage costs. Due to understocks, you are unable to fulfill orders and miss sales, ultimately losing profits with losing brand reputations.
What causes overstocking? ›Overstocking occurs when retailers accumulate more inventory than they can sell. The excess inventory piles up on shelves or in the warehouse for an indefinite time. The tricky part is that it's not immediately obvious. Quite often, these small piles of inventory go unnoticed.
What are the causes and consequences of holding excess inventory? ›Excess inventory is when stock levels for an item exceed their forecasted demand in an uncontrolled manner. Carrying excess inventory is inefficient and has operational costs and financial implications. These include tying up much needed capital, increased carrying costs and a risk of stock obsolescence.
Which consequences may overstocking of materials have? ›What are the effects of overstocking? Overstocking products can lead to increased levels of inventory in store and in warehouse. You risk product being expired or trouble selling later if there is reduced demand.
What are the consequences of over inventory and under inventory? ›Excess inventory can result in stock obsolescence
The reasons for excess inventory usually include poor forecasting and purchasing e.g you've over-projected your demand and/or bought too much of the wrong items. If demand for those items then hits zero for a prolonged period of time, the result is obsolete stock.
5 Negative Effects of Keeping Too Much Inventory
Limits cash flow. Reduces profits. Increases storage costs. Heightens risk of product obsolescence.
Overstocking is one of the most important factors which results in changes of carbon stocks (Reeder and Schuman, 2002) and soil degradation, particularly in sandy soil, vulnerable to degradation through physical erosion.
Why overstocking should be avoided? ›Not having enough parts in stock to fulfill a request is a nightmarish situation for any maintenance manager. It leads to longer repair times and periods of downtime which should both be avoided at all costs.
What are the consequences of poor inventory management? ›Beyond having too little or too much inventory, poor inventory management causes inefficiencies because you don't have accurate real-time information on how much stock you have. This increases the risk of mistakes in reordering inventory from suppliers or of selling non-existent inventory.
How do you avoid stock out and overstock? ›Inventory audits should be conducted on a regular basis to correct inaccurate counts that can lead to overstock and understock scenarios. This is also the best way to keep your inventory forecast accurate. FIFO and LIFO accounting help you manage inventory and the financial impact of carrying inventory.
Why is overstocking a problem? ›
Increased storage costs
The cost to store surplus stock is one of the most prominent downsides of overstocking. Warehousing costs are not cheap, and they don't just include the cost to rent a warehouse or storage space but also the cost of labor to manage your warehousing operations.
over·stock ˈō-vər-ˌstäk. plural overstocks. : a surplus of stock : an excessively large inventory of goods. Dealers were reminded at the fall Comdex show that they could lose their contracts if they were caught selling their overstock of PCs …
What is the word for overstock? ›balance, fat, glut, overflow, overrun, oversupply, remainder, surfeit, excess, overage, overkill, overmuch, plethora, plus, residue, superabundance, superfluity, surplusage, the limit, too much.
What are the consequences if inventory is not tracked? ›The effects of too little inventory
Not keeping track of inventory levels can lead to stock out of popular items during a sudden surge in demand. This can happen due to peak season or other external factors. Having sufficient stock is crucial.
A high inventory turnover ratio usually indicates that products are selling in a timely manner, and that sales are good in a given period. However, an inventory ratio that is too high could mean that you need to replenish inventory constantly, which could lead to stockouts.
How does Overstocking damage the environment? ›Mismanaging grazing land by overstocking can lead to soil erosion, bush encroachment, drying up of springs and low animal productivity (Doran et al 1979). Environmental effects of overgrazing are contribution to contamination of ground water, eutrophication and compaction of soil (Li Pun et al 2004).
How do you prevent overstocking in a warehouse? ›Material storage and handling.
Place heavier loads on lower-to-middle shelving. Do not stack items high enough to block sprinklers or come in contact with overhead lights or pipes. Remove objects from shelves one piece at a time. Keep aisles and passageways clear, and ensure safe clearances for equipment.
When the quantity firms supply is greater than the quantity customers want to buy. This is resolved when firms reduce prices to sell off excess supply. Lower prices discourage supply and encourage demand until the excess is removed.
What do companies do with overstock? ›Overstocks and Closeouts
Merchandise that isn't bought by store buyers is left over and must be sold to reclaim the manufacturer's investment, and if the cost of manufacture is low enough, the liquidation price can cover those costs or even result in a small profit. Closeouts are similar.
Insufficient Order Management:
One of the most common challenges to sound inventory management is preventing the overselling of products and running out of inventory. Using historical and seasonal data trends can help you accurately predict customer orders.
What are the disadvantages of being out of stock? ›
Not only do they lead to lost sales, but out-of-stocks also result in reduced customer satisfaction and lower loyalty levels. Shoppers often feel let down when you don't have what they're looking for, and the last thing you want is to disappoint customers.
What are overstock products? ›When referring to overstock merchandise in the form of consumer goods in a retail operation, the term refers to goods that have never been purchased by a customer but that are considered excessive stock from shelves and/or warehouses.
What is overstocking and understocking? ›In all forms of retail, overstocking is when a company orders too much inventory and understocking is when a company orders too little. To minimize the likelihood of overstocking and understocking, retailers utilize a systematic process of sourcing, storing, and selling inventory, known as inventory management.
Is overstock a wholesaler? ›Overstock.com, Inc. is an online retailer that sells excess inventory at discounted prices.
What is surplus in simple words? ›noun. sur·plus ˈsər-(ˌ)pləs. : the amount that remains when use or need is satisfied. : an excess of receipts over disbursements. : the excess of a corporation's net worth over the par or stated value of its stock.
What is another name for synonym? ›There is another possibility, though: poecilonym. This is probably the closest synonym of synonym, although it's antiquated and rarely used. David Grambs, a lexicographer for American Heritage and Random House, included it in his 1997 book The Endangered English Dictionary: Bodacious Words Your Dictionary Forgot.
What are the disadvantages of overstocking and understocking the trolley? ›Never over stock or under stock the cart: Overstocking will increase the risk of accidents or damage to the supplies. Whereas under stocking can slow down the efficiency of cleaning because of the regular trips to the floor pantry to collect the required items. 10.
What could be the consequences of a business carrying too little stock? ›too little stock means lost income in the form of lost sales, while also undermining customer confidence in your ability to supply the products at time of purchase. the wrong stock means lost income in the form of lost sales, write-offs and poor customer service.
What are the consequences of poor stock control? ›Beyond having too little or too much inventory, poor inventory management causes inefficiencies because you don't have accurate real-time information on how much inventory you have. This increases the risk of mistakes in reordering inventory from suppliers or of selling nonexistent inventory.
Is it better to be overstocked or understocked? ›Stocking the correct amount of inventory can be a challenging task for many retail store owners. If you overstock, then you're left with costly excess inventory. On the other hand, if you understock, you miss out on sales.
What are the consequences of leaders not addressing inventory needs? ›
Failure to understand inventory needs.
Not understanding inventory needs will result in over-ordering or under ordering, contributing to backorders and upset customers.
A low inventory turnover will often mean you're holding too much stock, increasing your carrying costs, such as warehouse costs, utilities, insurance and opportunity costs.
Why is it important to control your stock? ›The purpose of stock control is to reduce the costs of holding stock while ensuring you can meet customer demand and making sure that there's enough material for production. Businesses should always have a 'safe' amount of stock so that they're able to react and cover any unforeseen issues.