In this blog we are going to explore why businesses sell overstock inventory, alongside some methods to clear overstock inventory if you find yourself stuck with it. Selling overstock inventory can be a real pain for some businesses! But after this blog you should be well equipped with the knowledge on why businesses sell overstock merchandise and what they do about it.
What is Overstock Inventory?
Inventory overstock is when a business or individual has an excess of inventory, in comparison to that inventory's demand (sales). This surplus/excess stock usually takes up a lot of space, and many businesses find themselves just sitting on it.
What causes overstock Inventory?
The most common cases of overstock inventory are:
Poor Sales Forecasting
Poor sales forecasting can lead to overstock merchandise due to: Seasonal changes, unpredictable weather, badly predicted consumer demand.
Inventory management
Poor inventory management, stemming from insufficient visibility, inefficient practices, storage issues, and inadequate supplier management, leads to overstock. For smaller companies, the leading cause of overstock inventory is not having an inventory management system in the first place.
Overbuying Due To Supply Chain Issue
Because of supply chain issues, many companies hold more stock than they actually need. Often this causes overstock inventory when businesses miss buy, and over commit to products that have little demand.
Production Overruns
Production overruns can happen for a lot of reasons, such as: production efficiency, supplier issues, contractual obligations, EOQ, Capacity utilisation.
Changing Consumer Trends
This can be a prevalent issue for importers of FADs. Often FADs have a short product life cycle, such as 12 months. These items have huge demand early on, and tail off after some time. This can be an issue for importers as often products will not arrive for 3 months, which is enough time for demand to hugely drop when dealing with FADs.
Economic Factors
Economic factors can cause overstock inventory due to base rate changes. EG, the base rate increases, consumers are seen to have less disposable income, therefore demand for premium products, or unnecessary/luxury products, could fall leading to overstock inventory.
Why do companies overstock?
Companies have overstock for reasons such as: not wanting to lose out on revenue from being out of stock, maintaining reputation by making sure they always have common lines stocked. Having overstock gives companies a buffer.
Why do Businesses sell overstock inventory?
Businesses sell overstock inventory for several reasons:
Free Up Cash Flow
Holding excess inventory ties up capital that could be used for other purposes, such as investing in new products, expanding operations, or paying off debts. Selling overstock inventory allows businesses to convert stagnant assets into cash, improving liquidity, and allowing the business to reinvest into itself.
Maximise Warehouse Space
Overstocked merchandise takes up valuable warehouse space, which can increase storage costs and reduce operational efficiency. By selling overstock items, businesses can free up space for more profitable or faster-moving products, increasing their revenue per sqft.
Prevent Obsolescence
Products sitting in warehouses for too long risk becoming obsolete or outdated, leading to potential losses if they cannot be sold at their original price. Selling overstock inventory helps prevent this by moving products before they lose their market value.
Avoid Storage Costs
Storing excess inventory incurs additional costs for warehousing, maintenance, insurance, and security. Selling overstock items allows businesses to avoid these ongoing expenses associated with holding onto excess stock.
Maintain Cash Flow Stability
Consistent sales of overstock inventory can provide a steady stream of revenue, helping businesses maintain cash flow stability during periods of lower demand for their primary products or services.
Clear Shelf Space
Retailers often need to make room for new merchandise or seasonal items. Selling overstock inventory helps clear shelf space, making room for fresher products that may attract more customers.
Mitigate Risk
Holding excess inventory carries the risk of depreciation, damage, or theft. By selling overstock items, businesses can mitigate these risks and minimise potential losses associated with inventory shrinkage.
Meet Financial Goals
Selling overstock inventory can contribute to meeting financial goals such as reducing debt, achieving profitability targets, or increasing return on investment.
Overall, selling overstock inventory allows businesses to optimise their resources, reduce costs, generate revenue, and adapt to changing market conditions more effectively.