Did you know that two-thirds of retailers found themselves with excess inventory during the 2023 holiday season alone? Inventory glut, or having more stock than you can sell in a reasonable timeframe, can be a major blow to any business.
Inventory glut refers to a situation where a business ends up with an excessive amount of unsold inventory. This ties up working capital, takes up warehouse space, and can lead to write-downs or liquidations at low prices. It is a widespread problem plaguing businesses of all sizes, and it can be financially crippling.
What is Inventory Glut?
Inventory glut happens when supply exceeds demand – more products are coming in than customers are buying. This mismatch between forecasts and actual sales puts eCommerce businesses in a difficult position.
Excess inventory inflates costs for storage, labour, insurance, etc. It also makes it operationally challenging to pick, pack and ship orders efficiently. Ultimately, a glut means lost profits and reduced margins.
Why Does Inventory Glut Occur in eCommerce Businesses?
Inventory glut, also known as excess inventory, occurs when a business stocks more inventory than it can sell.
Several key causes lead to the buildup of excess inventory:
1. Over Forecasting Demand
One of the main causes of the inventory glut is over-forecasting demand. When sales forecasts are too optimistic, businesses will overorder inventory. However, if actual demand does not meet the inflated forecasts, that extra inventory goes unsold. Forecasting errors are common during new product launches or promotions when there is uncertainty around demand.
2. Lack of Demand Planning
Insufficient demand planning also contributes to excess inventory. Demand planning uses historical sales data, marketing plans, and industry trends to predict future demand. Without systematic demand planning, inventory purchases may be based on guesswork. Businesses that neglect demand planning are more prone to purchasing too much unneeded stock.
3. Excessive Stockpiling
Some businesses deliberately build up excess inventory in hopes of avoiding stockouts or gaining economies of scale. However, stockpiling inventory carries risks, as demand may change or products deteriorate over time. Large batches and long lead times also make it hard to respond to shifts in consumer demand. Excessive stockpiling can therefore lead to unsellable surplus inventory.
How Does Inventory Glut Affect a Business?
Having too much inventory that isn’t moving can significantly hurt your business. Excess inventory is a $250 billion problem in the U.S. alone. Here are some of the main disadvantages of an inventory glut:
1. Increased carrying costs
Storing excess inventory takes up costly warehouse space and ties up cash that could be used elsewhere. You have to pay for the space, equipment, labour, insurance, and other overhead costs to store it.
2. Obsolete inventory
Products can become obsolete over time, meaning they are no longer in demand. Holding obsolete inventory leads to write-offs when you have to dispose of it at a loss.
3. Lost sales
Excess inventory prevents you from having the optimal mix of products to meet current customer demand. Out-of-stocks of items in high demand lead to lost sales opportunities. Customers may also turn to competitors if you need the right mix.
6 Strategies to Tackle Inventory Glut
Strategy 1: Improve Demand Forecasting
When creating forecasts, it’s important to factor in seasonality, promotions, and marketing efforts that may impact sales volumes. Looking at past sales during peak seasons or popular campaigns can provide useful insights into expected upticks or drops in demand.
Use proprietary software that can greatly enhance forecasting capabilities. These tools apply algorithms to sales data to create different demand forecasts based on configurable inputs like seasonality, trends, promotions, and other criteria.
More accurate demand forecasts mean less guesswork, fewer stockouts or surpluses, better customer service, and reduced inventory costs.
Strategy 2: Retail Partner Visibility
Having visibility into your retail partners’ inventory and sales data is crucial for avoiding an inventory glut. By sharing inventory data across the supply chain, you can better understand real demand and align inventory planning.
Some tips for improving retail partner visibility:
- Share inventory levels, sales data, and forecasts with retail partners. This gives you insights into what’s selling and what’s overstocked.
- Set up a vendor-managed inventory (VMI) program. This allows you to monitor and manage your retail customers’ inventory directly.
- Use shared forecasting platforms to collaborate on-demand plans with retailers. This ensures you’re both working from the same demand signals.
- Ask retailers to provide inventory sell-through reports. This shows you how quickly items are selling to consumers.
Strategy 3: Optimize Replenishment
Replenishment is the process of restocking inventory once it has been sold or used. Optimizing replenishment helps ensure you have just the right amount of inventory available when needed, without excess stockpiling.
Here are some tips:
- Use supply chain software to gain visibility into inventory levels across your retail network. This allows you to see what’s selling and what needs to be reordered in real-time.
- Automate ordering through software integrations. Set parameters to trigger automatic restocking when certain products reach predetermined minimum levels. This takes the guesswork out of when to reorder.
Read Also: What is Distributed Order Management?
Strategy 4: Implement Lean Processes
Lean manufacturing principles help eliminate waste in production and business processes. For inventory management, lean practices can significantly cut excess stock and storage costs.
Some effective techniques include:
1. Reducing Overproduction
Manufacture products based on real demand, not forecasts. This minimizes unsold finished goods.
2. Optimizing Inventory Turns
Strive for just-in-time inventory flows. Faster turns reduce safety stock and the risk of obsolescence. Monitor turns by SKU.
3. Improving Inventory Accuracy
Ensure inventory records match physical stock counts. Invest in WMS and barcoding to cut errors. Conduct cycle counting for continuous visibility.
4. Streamlining Storage
Organise warehouse layouts for maximum space and efficiency. Adopt compact vertical storage when possible.
5. Cutting Motion Waste
Design optimized warehouse workflows to minimize pick/pack travel distance.
Read Also: What is Smart Warehousing?
Strategy 5: Rationalise Product Lines
Eliminating underperforming SKUs and focusing more on your profitable products is an effective way to prevent an inventory glut. Carefully analyze your product portfolio and sales data to identify which items are not selling well or yielding low margins.
This “rationalization” of your catalog allows you to remove stagnant inventory and avoid future buildups. Streamline operations by reducing the number of SKUs and varieties managed. Discontinue inefficient or duplicative product lines that consume resources and warehouse space without generating sufficient payoff.
Consolidating and optimizing your product mix enables you to turn over inventory faster while freeing up cash flow previously tied up in excess stock. Maintaining lean but targeted product lines prevents glut situations down the road.
Strategy 6: Improve Demand Sensing
Demand sensing uses predictive analytics and external data to gain insights into customer demand. Rather than relying solely on historical sales data, demand sensing analyses market trends and external factors that may impact future demand.
Some tips for improving demand sensing:
- Use predictive analytics tools to identify patterns and changes in customer behaviour. Look at leading indicators that may signal shifts in demand.
- Incorporate external data like competitive intelligence, macroeconomic factors, regional trends, and industry reports into your forecasts. This contextual data provides a more accurate view of expected demand.
- Leverage AI and machine learning algorithms to process large volumes of data and detect subtle changes that impact demand. These technologies can continuously recalibrate forecasts based on the latest data.
- Collaborate across functions like sales, marketing, finance, and procurement to get a cross-functional view of demand drivers.
Wrapping Up
Effectively managing inventory glut requires a comprehensive strategy. ShipTop’s warehousing infrastructure provides a secure and scalable foundation for your inventory storage and distribution needs.
Our advanced inventory management systems offer real-time data and insights into stock levels, demand trends, and sales forecasts. This empowers you to make data-driven decisions regarding ordering quantities and optimize your inventory flow, effectively mitigating the risk of overstocking.
Furthermore, our strategically designed fulfillment warehouses position your inventory closer to your customers.
By partnering with ShipTop, you gain access to a team of fulfillment experts dedicated to helping you achieve optimal inventory levels.
Contact us today to discuss your inventory and fulfillment needs. Or fill out the form to get a quote.