Why inventory builds up and how to fix it

Why inventory builds up and how to fix it

'A necessary evil' refers to something that is inherently harmful, yet unavoidable. From a management perspective, inventory is often considered a necessary evil. Reducing and eliminating it as much as possible can improve business performance, but inevitably, some amount of products must be stored in warehouses for sales. Thus, inventory managers must strive to maintain a proper level of inventory to avoid overstocking. If the inventory level keeps increasing, the cause of the increase must be quickly identified to prevent overstocking. But why does overstocking occur in the first place?

Factors Causing Overstock

Irregular changes in demand is one of the main reasons for overstocking. Typically, the person in charge of ordering bases their order plans on past sales data for similar periods or recent order status. If unexpected demand changes occur, more products than predicted remain in the warehouse.

Here is an example. A sudden surge in demand for a product in recent days forced Company A to repeatedly notify customers of product shortage. In order to keep their promise to customers, Company A ordered more products than usual to meet the increased demand. But soon, the demand dropped to a level lower than usual. What happens then? It leads to an overstock that Company A has to bear.

A man checking inventory data on a laptop in a warehouse.

Overstock can also be caused by mismanagement of product life cycles. The product life cycle is a theory that every product, like a human, has a life span and goes through ups and downs over time. Products entering the maturity stage, where sales are stabilized, experience a decrease in sales as they lose customers to growing competition. Products entering the decline stage, losing their competitive advantages, see even fewer sales as they fall out of customer interest. All unsold products pile up as overstock.

Click here to learn more about Product Life Cycle (PLC) management!

Sometimes, the overestimated level of safety stock leads to overstocking. Safety stock refers to the inventory secured in advance to deal with the uncertainty of business. It is for situations like supply disruptions or sudden increases in demand. But what if the inventory kept for safe sales is excessively high compared to the actual demand? The unsold portions tend to turn into overstock. This problem occurs due to a lack of regular review of the appropriate safety stock level.

Inventory Management to Prevent Overstocking

If inventory is a necessary evil, overstocking must be absolutely prevented as if it were an absolute evil. Even though stocks are just stored in the warehouse, they continuously induce costs. In addition to the costs of producing or purchasing the products, there are countless inventory associated costs such as wages, lease for the warehouse, heating and cooling, loss due to long-term storage, and disposal for outdated inventory. Therefore, if a company is experiencing overstock, it should immediately roll up its sleeves and start improving the inventory management process to prevent overstock.

Understanding Inventory Status

Let's start by checking how much of the stock exceeds the predicted demand. As mentioned earlier, not all inventory is 'absolutely evil'. A certain amount of inventory is a 'necessary evil' that must be held for smooth operations. Just looking into the warehouse every day does not allow you to accurately grasp the inventory situation. Try to objectively understand the inventory status by stepping back and conducting regular inventory checks.

• Are there any products that have not been sold for more than 30 days?
• Are there any products with lower inventory turnover rates compared to the past?
• Are there any products whose value has dropped due to the release of new products?
• Are there any products that have become old or altered due to long storage periods?

The first step in preventing overstock is to analyze the inventory situation regularly and diligently based on these questions.

If you're curious about the importance of regular stocktaking, click here to check it out!

Checking the checklist with a pen.

By keeping a good check on stock status, counterintuitive decisions like requesting production or orders even when there is sufficient stock can be avoided. However, it's not possible to conduct a daily inventory inspection. Therefore, it's important to keep track of real-time inflow and outflow status.

But if multiple inventory managers record the inflow and outflow status manually or manage it through files, it becomes difficult to trust the real-time inflow and outflow status. Situations can occur where the inflow and outflow status confirmed by the inventory manager is not reflected in real-time on the inventory management file, leading the order manager to proceed with additional orders, resulting in overstock.

In this case, the introduction of an inventory management solution that can record and manage the process from ordering to shipment of a product in real-time is very helpful. BoxHero, a class-leading inventory management solution, allows managers to manage real-time inflow and outflow status in the cloud anytime, anywhere. With the barcode scanning feature, you can update the stock status while proceeding with the inflow and outflow process, and with the inventory analysis feature, it's helpful to review the stock turnover rate or stock status by period whenever you need.

BoxHero's stock shortage alert prevents the order manager from accidentally placing additional orders before the stock is depleted. Set a reasonable level of safety stock in BoxHero and get notified of products with stock below the safety stock level through the mobile app.

BoxHero mobile app's Low Stock Reminder feature.

Adjusting order quantity through accurate demand forecasting

If the actual sales volume is less than the expected sales volume, it's time to beware of overstock. At the same time, it's also time to strive for more accurate demand prediction. Of course, responding to sudden demand changes is not easy. However, by thoroughly analyzing past sales data to gauge demand and keeping an eye on all aspects, such as the latest consumer trends, price changes, and news of competitor product launches, you can certainly respond more flexibly. It's a good idea to share trends through collaboration with sales or marketing managers for this purpose.

Male and female collaborating while checking data at work.

Neither can demand forecasting be always successful nor does successful demand forecasting always result in sales as expected. You always have to review whether the actual sales volume is aggregated to a level similar to the expected sales volume, and if there's a discrepancy, you have to carefully identify what part of the prediction was off. Repeated demand prediction, sales volume comparison, and order plan modification are the shortcuts to inventory optimization that reduces overstock.

By setting the maximum stock quantity based on demand prediction, you can prevent overstock much more efficiently. Having an upper limit on stock prevents losses above a certain threshold, even if there are factors causing overstock.

Just as business owners often worry about "how can I sell more products?" they also have to make a deliberate effort to reduce stock. Try practicing inventory management to prevent overstock by identifying the causes of stock increase, together with a smart and convenient inventory management solution.

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