What is Overstocking? (Causes & How to Avoid It)
You never want to miss out on serving your customers so you make sure you always have enough stock to keep them happy. Sounds great, except you could be overstocking and that’s just as bad as having no stock at all.
But what is overstocking? Simply put, it’s when you buy more inventory than you can sell.
It increases your cost of inventory and takes up space where better selling items could be helping your business grow. Replenishing the right quantity of inventory at the right time helps reduce and avoid overstocks.
In this article, you’ll learn why overstocking inventory is a huge problem for e-commerce and retail businesses, what causes overstocks and how you can avoid them.
Table of contents
- What is Overstocking?
- Overstocking vs Understocking
- Why is Overstocking Inventory a Problem?
- What Causes Inventory Overstocking?
- How to Avoid Overstocking Inventory With Singuli
- What is Overstocking? It’s Something You Need to Avoid
What is Overstocking?
Overstocking inventory is when you order more stock than you can sell. It creates surplus stock, which is left sitting on shelves, taking up space and costing you money. You can even end up with expired or obsolete inventory, which is a waste of valuable time and money.
Overstocking vs Understocking
If overstocking inventory creates a surplus stock that you can’t sell, then understocking inventory does the exact opposite. You quickly run low on stock and eventually create stockouts, which come at a cost. Both overstocking and understocking are bad for business and both can result in a loss of revenue for your business.
Why is Overstocking Inventory a Problem?
You’ve already learned that overstocking inventory costs your business money and time but why is it so important to avoid overstocks?
Inconsistent Cash Flow
Too much stock means your cash is tied up in inventory that isn’t selling, leaving you with less cash to invest in better selling stock, marketing, sales and other profitable business projects.
Increased Inventory Storage Costs
Holding onto stock is expensive. You have to pay for the space it’s taking up in your warehouse or in a 3PL (third-party logistics). The longer your inventory sits there, the more expensive it gets.
Risk of Dead Stock
Nobody likes dead stock. You’ve invested in products that you know your customers need but you’ve bought too much. It sits and sits and never sells until one day, it’s past its expiry date or is no longer trending and can never be sold. Wasted stock is lost revenue and it hurts.
You can sometimes sell stock that’s close to expiry at below-margin prices but that means you’re not making a profit on it. It can be worth it to free up resources and it’s better than not getting any revenue at all.
Overstocking inventory for one or two products can cause understocks for your other products as you don’t have the space or capital to replenish. If you can’t create space quickly enough, or free up cash, this can cause stockouts. Stockout costs hurt just as much as overstocks and can ruin your customers’ experience.
What Causes Inventory Overstocking?
Before you can work out how to reduce inventory overstocking, you need to know what causes it in the first place.
Bad Demand Forecasting
Demand forecasting is tricky. There’s a lot to think about, from data inputs, to seasonality, spikes, trends and more. Creating accurate forecasts requires gathering all relevant data and putting it into the best inventory planning software available.
📌Get Started: With Singuli’s Advanced Forecasts, it’s easy to analyze historical data, market trends and customer inputs, which saves you or your inventory planner time and increases forecast accuracy.
Fear of Stockouts
Stockouts hurt your bottom line and you want to avoid them, but at what cost? If you avoid stockouts by overstocking inventory, you’re still hurting your bottom line. Instead of fearing stockouts, you can put plans in place to avoid them. Safety stock, ABC analysis and the right inventory forecasting methods help. Adding relevant data to the right inventory planning software makes the biggest difference.
📌Get Started: Optimize your inventory levels and reduce overstocks. Use Singuli to replenish the right amount of stock at the right time so your inventory costs stay low.
Changes in Seasonal Demand
Selling 500 red short sleeved t-shirts from June to September doesn’t mean you’ll sell 500 red short sleeved t-shirts from October to January. Seasonality causes changes in demand and it’s important to take it into account with retail demand planning.
📌Get Started: Seasonal trends change all the time so make sure you’re planning for them with Singuli’s Advanced Forecasting.
Not Considering Marketing Campaigns
Marketing campaigns can make a big difference to demand but how much difference depends on a number of factors. When you’re planning your inventory, you need to realistically predict demand and that means you need to properly assess marketing data, as well as historical data, seasonality and all other relevant inputs.
Promotional marketing follows patterns that the right software can analyze and apply to new campaigns so you can create more realistic forecasts, making it less likely you’ll order too much stock.
📌Get Started: Understand what’s working and turn your performance marketing into a category level forecast with Singuli’s Performance Marketing.
Poor Inventory Planning and Management
Inventory costs are wide and varied but the three main types consist of purchasing costs, shortage costs and carrying costs. Carrying costs are especially relevant to overstocking. They include labor, shipping, opportunity cost, warehousing, storage and depreciation.
All of these affect your break-even point but not every business considers them when they’re planning inventory. To plan well, you need to include all relevant data sets and use the right software to analyze your costs.
💡 Pro Tip: Capture all relevant inputs with Singuli’s transparent, model-based forecasts.
Overcompensating for Supply Chain Issues
Pandemics, wars, natural disasters, supplier-side strategy changes, inflation and things we’ve yet to think about affect supply chains. Understandably, when something big happens, you want to manage the situation and reduce risk.
This often means you buy more inventory than you need, just in case you can’t get enough in the future. The problem is, you sometimes buy too much. Instead of overstocking, you can widen your supplier base and build strong supplier relationships so you’re their priority.
A detailed analysis of supplier lead times, up-to-date stock lists and wider commercial data helps. You can use all the relevant data you have to plan for multiple scenarios with the right software.
💡Pro Tip: Plan for multiple versions of the future with Singuli’s Scenarios. Ask “what if” and get answers immediately
Not Accounting for Anomalies
Spikes in demand can cause stockouts. An actor wearing your pants on the red carpet or a basketball player putting on one of your bracelets in a post game interview can quickly raise demand.
Although these events can also increase longer term sales, the short term effects are often way bigger. If you don’t take demand spikes into account when forecasting future inventory needs, for example with an ABC analysis, you might overstock an item that has already moved down to a B grade product that no longer has as much demand.
💡Pro Tip: Maintain optimum stock levels and adjust to sudden changes by using Singuli to manage multiple vendors and products with different lead times.
Miscalculating New Product Sales
All inventory forecasts are hard forecasts but launching a new product has separate challenges. You don’t have any historical data, so without the right strategy, you’re sticking a finger in the air and seeing which way the wind blows. You’re just as likely to overstock as you are to understock, unless your new product forecasting is inputting all relevant data into the best software.
💡Pro Tip: Use your past sales and product attributes to recommend accurate initial inventory orders with Singuli’s New Product Forecasts.
Forgetting About Size Curves
Overstocking isn’t just about product categories, you might have the right quantities for a size M formal shirt but way too many size XS because you didn’t calculate for size curves or used a simplistic version of WOS (weeks of supply).
📌Get Started: Automatically compute the right size curve for every sized-based product in your assortment with Singuli’s size-based forecasting and planning tools.
How to Avoid Overstocking Inventory With Singuli
You know that overstocking inventory isn’t good for business, so how do you avoid it? Your best is using inventory optimization software like Singuli. Here’s how it can help:
Automate Your Demand Forecasts
Reduce overstocks, improve margins and avoid stockouts by automating your demand forecasts. There’s a lot to consider when you’re forecasting, from new products, to spikes in demand, to seasonality, trends, size curve, performance marketing and more.
It’s possible to forecast manually but it’s much harder and greatly increases the possibility of human error. Factor future demand, make quick work of new product forecasts, get the right quantity of stock for every size curve and be ready for anything with Singuli.
Get 360 Supply Chain Visibility
See your best options for future orders in real time. Track shipments, split orders, stay on top of who did what and keep everything fresh. To reduce overstocks, you need to know where your supply is coming from, how long the lead times are and if there’s likely to be something getting in the way of your purchase orders. Singuli provides you with all the analytics you need.
Make Data-Backed Inventory Decisions
Choosing how much inventory to order based on intuition alone only works for so long. Make data-backed inventory decisions to increase accuracy and stay ahead of the curve. With Singuli, you can access any metric with custom reports, review current sales velocity, get ahead of stockout dates and work out the probability of overstocks.
When you know which SKUs (stock keeping units) drive the most returns and you group all your reports into relevant data sets, it’s much easier to analyze and plan for the future. For example, you can use the right data to get an accurate ABC analysis and combine it with future marketing campaign data to make sure you’re bringing in the right quantity of stock.
Put Reordering and Replenishment on Autopilot
Order too late and you’ll lose sales. Order too early and you’ll incur overstocking inventory costs. Reorder and replenish on autopilot with Singuli and you’ll bring in the correct quantity of stock at the right time.
Sync Data Across Multiple Channels
Never leave any part of your business behind. Keep marketing and sales in sync, integrate with sales channels and forecast accurately across multiple locations. Omnichannel inventory planning allows you to predict demand across retail, wholesale, e-commerce and direct channels. Instead of having the right total inventory in the wrong places, you’ll have the right stock everywhere.
What is Overstocking? It’s Something You Need to Avoid
Now that you know exactly what overstocking is, why it causes problems, what causes it and how to avoid it, it’s time to plan your inventory forecasts so that overstocking stops being a problem. Start by finding out more about Singuli.
Overstocking Inventory FAQ
What Does the Term Overstocking Mean?
The term overstocking means you have more inventory than you’re able to sell. When this happens, your costs of inventory rise and you reduce the space you have to bring in better selling stock.
Is Overstocking Better Than Understocking?
Overstocking and understocking are both bad. Understocking and stockouts can have benefits like creating FOMO (fear of missing out) but the negatives of both usually outweigh the positives. The best option is to use accurate inventory planning software to avoid overstocking and understocking.
What Are The Top 3 Consequences of Overstocking?
- Restricted cash flow
- Higher storage costs
- Dead stock
How Can You Mitigate Overstocking?
- Offer discounts to clear stock
- Give unwanted inventory to charity
- Recycle and reuse parts and materials
Forecast demand, issue and track POs, reorder on autopilot, and step up your reporting game across multiple channels and locations. Get in touch to see how Singuli can help you optimize your inventory.