Many retailers are constantly worried about out-of-stock situations, so they overcompensate and believe they are solving the problem; instead, they create another one; overstock. Overstocking is a major issue on its own and can lead to significant costs for retailers, estimated at $123.4 billion annually in the US, as well as potential damage to their brand and environment. In this blog post, we will explain why overstocking is so dangerous to retailers and how to avoid it.
Moreover, the pandemic that disrupted supply chains caused retailers shift from Just-in-time to Just-in-case practices, leading to more overstock.
Why is overstocking a problem?
Overstocking refers to having an excess of inventory beyond what's necessary and in excess of demand. This often results in having more inventory than can be sold through normal operations, and it comes at a cost.
Retailers lose money by overstocking
The first problem caused by overstocking is the cost of course. Overstocks cost retailers in the US around $123.4 billion every year. When a business has excess inventory, it may not generate the anticipated revenue for that item due to reduced prices and discounts. Additionally, having more stock means paying for more shipping, storage, and labor, and if sales don't cover production, handling, transportation, and storage costs, then the business will lose money.
It can damage the brand’s reputation
Having overstock forces businesses to sell items at reduced prices which can damage the brand's prestige if it happens frequently. Seeing the brand’s items sold at a very low cost can make clients believe they are buying cheap products. Moreover, if the client knows that eventually there will be discounts, they might not be willing to pay full price for your items anymore.
Also, In today's fast-paced world, trends change quickly, and customers expect businesses to keep up with the latest trends. If a customer visits a store and finds only last season's collections, they may perceive the business as outdated, which can be detrimental to the retailer's reputation. Moreover, extra inventory makes it hard to manage, so popular items and sizes may be missing while the store is fully stocked with stock that is not selling.
It’s harmful to the environment
The overstocking process requires an increase in production, which without justification causes waste and can have detrimental effects on the environment. It wastes valuable resources such as energy, water, and raw materials. Additionally, the excess inventory resulting from overproduction often ends up in landfills, contributing to environmental pollution.
Certain brands manage inventory overstock by collaborating with re-commerce businesses to sell excess inventory in secondary markets. Although this allows the brands to receive payment for the items, albeit at a lower price point than they would typically expect, and helps reduce the negative environmental impact of burying the items in landfills, this approach only provides a temporary solution to the problem of overstocking. Ultimately, it does not address the root cause of the issue.
How can retailers avoid inventory overstock?
To solve overstocking retailers should eliminate the blind spots in their supply chain. Supply chain visibility solution such as Chainlane allows businesses to track all their items, count, and location across the supply chain. Such solution can help retailers avoid inventory overstocking in 3 ways:
End-to-end tracking capability
Item-level inventory tracking across the entire supply chain enables decision-makers to manage inventory in real-time and make informed decisions to optimize inventory levels for each item. In addition, it offers the ability to track dwell times and identify bottlenecks in real-time and adjust accordingly.
Reliable inventory counts and registrations
Leveraging technology to automate inventory counts and registrations can help prevent human errors, theft, and loss of inventory. By accurately tracking inventory levels, businesses can avoid overstocking and only order the necessary amount of each item along with data-driven estimation based on specific store demand, trends, and market movement. This approach can also reduce the risk of understocking and help retailers optimize their inventory management practices.
Smart demand forecasting
Apart from inventory tracking and management, Chainlane utilizes available data and provides valuable insights for demand forecasting. That way, businesses can plan accurately based on data for each location and each item. This data allows the inventory to be allocated wisely, leading to better sales and customer satisfaction.
In conclusion, overstocking can lead to significant costs, damage to brand reputation, and harm to the environment. To avoid these issues, retailers can use supply chain visibility platform like Chainlane to track inventory end-to-end, automate inventory counts, and registrations, and use data for demand forecasting to optimize inventory levels and improve sales and customer satisfaction.