Keys to avoid overstock and reduce costs in your company
Posted: Wed Jan 22, 2025 9:18 am
Overstock is one of the main consequences of poor inventory management. This can lead to several problems, from harming your company's operations to generating high extra costs. In this article we tell you how it is generated and what actions to take to prevent it.
What is overstock?
Also known as excess inventory or storage, overstock occurs when a company has much more products than it needs to meet customer demand. This means that a large percentage of the merchandise remains in the warehouse and is not consumed or sold.
Causes and consequences of overstock
Why does overstock occur? There are several causes. One of the main ones is poor purchasing planning, or even a complete lack of it.
To achieve optimal stock levels, business owners need to ios database key indicators, such as demand or the turnover rate of their products. If a product has a low turnover (i.e., it takes a long time to sell), it is not advisable to replenish very frequently or in large quantities. The same advice applies when a decline in demand is projected.
To understand this better, let's think about the following case:
Carola is an entrepreneur who runs a clothing store. She knows that during the winter, the demand for warm clothing increases. With this in mind, she must make sure to replenish this type of merchandise in time for the arrival of this season. However, as temperatures begin to rise, she knows that she must ask her suppliers for clothing for the warmer seasons and reduce or stop orders for warm clothing.
If Carola decided to stock her store with winter merchandise too late (or too early, when it's still summer), she would run the risk of being left with all these items in stock. This can lead to negative consequences for her business, such as:
Increased costs: Excess inventory can generate several additional costs regarding storage, insurance, transportation, among others.
Loss of space: The business will need more space to store stock, which can lead to inventory clutter and disorganization.
Stranded capital: Inventory represents an investment in the business's capital. If merchandise is not moving, this means that this investment is tied up and cannot be used to cover operating expenses.
Deterioration or loss of merchandise: the longer products remain in the warehouse, the greater the risk that they will be damaged, expire, lost or illegally stolen.
Obsolescence: Products may lose value or fall into disuse due to the emergence of new, more technologically advanced products.
What is overstock?
Also known as excess inventory or storage, overstock occurs when a company has much more products than it needs to meet customer demand. This means that a large percentage of the merchandise remains in the warehouse and is not consumed or sold.
Causes and consequences of overstock
Why does overstock occur? There are several causes. One of the main ones is poor purchasing planning, or even a complete lack of it.
To achieve optimal stock levels, business owners need to ios database key indicators, such as demand or the turnover rate of their products. If a product has a low turnover (i.e., it takes a long time to sell), it is not advisable to replenish very frequently or in large quantities. The same advice applies when a decline in demand is projected.
To understand this better, let's think about the following case:
Carola is an entrepreneur who runs a clothing store. She knows that during the winter, the demand for warm clothing increases. With this in mind, she must make sure to replenish this type of merchandise in time for the arrival of this season. However, as temperatures begin to rise, she knows that she must ask her suppliers for clothing for the warmer seasons and reduce or stop orders for warm clothing.
If Carola decided to stock her store with winter merchandise too late (or too early, when it's still summer), she would run the risk of being left with all these items in stock. This can lead to negative consequences for her business, such as:
Increased costs: Excess inventory can generate several additional costs regarding storage, insurance, transportation, among others.
Loss of space: The business will need more space to store stock, which can lead to inventory clutter and disorganization.
Stranded capital: Inventory represents an investment in the business's capital. If merchandise is not moving, this means that this investment is tied up and cannot be used to cover operating expenses.
Deterioration or loss of merchandise: the longer products remain in the warehouse, the greater the risk that they will be damaged, expire, lost or illegally stolen.
Obsolescence: Products may lose value or fall into disuse due to the emergence of new, more technologically advanced products.