Tips to Identify and Reduce Excess Inventory

By simple definition, excess inventory is stock that is purchased that exceeds your demand. Having excess stock is an age-old problem that often has even the most seasoned inventory planner baffled. Do not fall into the trap of thinking that having more than you need means you will lessen your risk of running out of stock and disappointing less customers.

The bottom line is that excess inventory is costing your business money. Besides the actual cost you pay for the products there are other less salient expenses to be aware of. The cost of the floor space in your warehouse being taken up by excess stock is one example.

Cash flow is essential to any business, so when it is tied up in dusty inventory, it is worth looking into the causes of excess so that you can free up some of that working capital and use it to grow your business. Being able to identify your excess inventory means you can minimize the risk of creating more.

Identifying excess stock

To quickly identify your excess stock, it is imperative that your inventory is correctly classified:

Non-stocked items

The goal of non-stocked items is to hold no stock. Any stock on hand (excluding your backorders) will generally be regarded as excess.

Stocked items

Being able to identify excess stock on your stocked items requires more information.

The stock on hand must not exceed the “safety stock plus the replenishment cycle stock.” This is referred to as the “maximum stock level.” Stock on hand that is greater than this quantity is considered to be excess inventory and should not be in the warehouse.

Note: The portion of this excess that can be disposed of without compromising customer fill rates requires a different calculation. Information for the impact of the lead time can be found further below

  • Accurate forecasts
  • Accurate lead times
  • Correct replenishment cycle
  • Safety stock must be correctly set.

The impact of lead times

The impact of the lead time in the replenishment process cannot be ignored when determining the quantity of excess that can be disposed of. Remember that if the excess above the “maximum stock level” is disposed of and there are no purchase orders in the pipeline, any order placed now would only arrive a lead time later.

Tip: Before considering an inventory management system, confirm that the system handles the impact of the lead time when calculating the “disposable excess quantity” for stocked items.

What does excess inventory cost your business?

Not all the costs of carrying excess stock are apparent. Here are costs that you may not have thought about.

  • The cost of the actual item
  • The cost of transportation to get your inventory to your warehouse
  • The cost of the space in your warehouse to store your inventory, including rent, utilities, property taxes, and insurance
  • The cost of safety equipment, such as fire suppression equipment
  • The cost of warehouse equipment, such as conveyor belts, trolleys, forklifts, and pallet jacks
  • The cost of labor and security in your warehouse
  • The cost of loss via obsolescence
  • The cost of loss via deterioration, expiration, and breakage
  • The cost of a lost opportunity in having your cash tied up in unsold inventory

The capital lying in the warehouse in the form of excess stock generates nothing of value. This will either have to be sold off at a low price, written off or scrapped. Management is usually reluctant to deal with this as it impacts the bottom line but ignoring it does not make it go away. The impact just escalates.

What are the causes of excess stock?

  • Over-forecasting is one of the most obvious causes as this results in over-ordering. The longer the lead time, the more dramatically over forecasting will create excess.
  • It is tempting to purchase a larger than normal quantity in order to get a ‘good deal,’ but this often ends up being a very bad deal. Accurate information, a thorough understanding of how money is made by turning inventory as quickly as possible, and a sound inventory management system are all essential when considering these ‘good deals.’
  • Calculating recommended order quantities using lead times longer than the supplier’s actual lead time results in deliveries being received before they are actually required.
  • Ordering without an effective inventory management system to calculate the recommended order poses a high risk. Without a system, the Buyer will always have an opinion on what quantity must be ordered. This opinion may well be unfounded.
  • Supplier’s minimum order quantities result in excess stock.
  • Ordering non-standard products without a firm customer order often results in excess.
  • Placing a poorly considered “initial purchase order” for a new product launch without thorough market research is a prevalent cause of excess.
  • Over-ordering products with a limited shelf life result in excess stock that cannot be sold, even at a considerable discount.

In conclusion

Excess inventory is a challenge for many companies. Your goal should be to lower your risk of generating excess.

Here are some suggestions to help you:

  • Invest in an inventory management system, like NETSTOCK that provides you with effective classification, forecasting, safety stock, and ordering features.
  • Choose an inventory management system with a dashboard that will identify and display the excess items by descending excess value.
  • Have the ability to identify and fix over-forecasted items as soon as possible.
  • Periodically review lead times, especially for the suppliers from whom you purchase the most inventory.
  • Since excess inventory will be generated from time to time, make sure you have a formal effective excess stock disposal process.

If excess stock is one of your inventory challenges, attend our free webinar in partnership with NETSTOCK on the 24th of November 2020 and learn how to Optimise Inventory Management and Improve Planning Efficiency.

If you need any more information on, Inventory Management Software, stock-outs or NETSTOCK, contact us here 1300 857 464 or send an email to [email protected]

Place orders quicker – Tips for optimal order replenishments

If you seem to continually swing between an excess inventory or stock-out situations, you are probably facing challenges with placing optimal orders.

Every order that you place ties up your working capital, so it is in your best interest to ensure that the orders you place are correct. If you order too much inventory, it will not be turned around in a reasonable time frame, and this tied up cash is giving you very poor or no return each year. If you order too little inventory, stock-outs occur, resulting in unhappy customers who end up at your competitors. The orders you place are critical for achieving optimal stock levels, customer service, and gross profit.

By answering the following questions, you will better understand where you are and where you need to be for optimal order placements.

Before you place your orders:

  • Do you consider an item classification status?
  • How do you factor in the sales forecast?
  • Are you using the latest stock on hand figures, and how accurate is it?
  • Are you considering all existing open purchase orders already placed on your supplier when ordering?
  • Are you factoring in the specific item’s risk profile, the target fill rate, and the safety stock levels?
  • Do you involve key people in the organization to give their valued input before determining your final order?
  • Are you specifying the amount to be ordered only to get a good price?
  • Do you know whether the order quantity will take you one step closer to achieving your model inventory level?
  • Is the total value of orders being placed within the agreed cash flow budget for the month?

Now that you understand where your gaps are in order replenishment, how should you be placing these orders?

There will always be times when customers’ buying patterns will change slightly or when your suppliers let you down with deliveries, but if you have this type of process in place, it will help your efforts to create ideal orders and minimize your risk or excess or stock-outs.

A sound inventory management system, like NETSTOCK, performs many of these steps and allows you to review suggested orders that the system provides to ensure that they are correct before committing valuable working capital.

If you find placing replenishment orders to be one of your inventory challenges, attend our free webinar in partnership with NETSTOCK on the 24th of November 2020 and learn how to Optimise Inventory Management and Improve Planning Efficiency.

If you need any more information on Inventory Management Software, stock replenishment, or NETSTOCK, call us on 1300 857 464, or send an email to [email protected]

 

 

 

Tips to Identify and Reduce Stock-Outs

We live in a world where anything you need can be accessed at the click of a button. As a result, suppliers need to ensure that they have the right levels of stock, at the right time, ready to be shipped.  If you are a supplier, what does this mean for you? Well, one thing is for certain – you need to avoid stock-outs as much as possible. Your customers will turn to your competitors to get their products, and with a good experience, they may never return.

It is important to understand why stock-outs occur. Once you can define those, you can put policies and processes in place that help to prevent these from occurring.

Some of the primary reasons that companies experience stock-outs are:

  • Underordering inventory due to underestimating the demand
  • Underordering due to poor decision making. Not having data insights such as forecast and lead time data, planned replenishment cycles, and safety stock leaves the buyer with very little to go on other than gut feel.
  • You ordered enough quantity, but your supplier did not deliver or only delivered a part of the order.
  • Using the incorrect lead time. If your supplier’s lead time is wrong and your delivery arrives later than planned, your re-order level should be lower.
  • A safety stock level that is too low to cover the risk profile of an item
  • Product quality issues which result in stock returns
  • The supplier is refusing to deliver due to a credit hold on your account from non-payment on your behalf.
  • A shortage of cash may limit the number of orders that can be placed each month. This could be caused by poor cash flow or other inventory issues such as too much cash tied up in excess inventory.

Dealing with the problem in the real world

The reality is that every business will suffer from stock-outs at some point.  With that in mind, it is important to focus on how to reduce the frequency of stock-outs. Below are some fundamental principles that will enable you to do that: 

  • A stock-out dashboard that identifies existing stock-outs. This allows management to resolve a stock-out effectively and timeously.
  • Communicate with your customer. The first step in a stock-out situation is to advise your customer and let them know how you intend to resolve the problem.
  • Look at sourcing the items from another branch or placing an emergency order with your or another supplier. A last-resort option is to buy the item from a competitor.
  • Appoint a person in the business to manage and resolve stock-outs. They need to be made aware that stock-outs are a top priority.
  • The stock-out process will be more effective if you rank by the highest potential lost sales so that these customers receive attention first. This enables the maximum benefit to be derived with the least effort in the least time.
  • A date stamp that identifies when the stock-out occurred assists in prioritization and management.

Be proactive – solve the issues before they become a problem.

Use the appropriate technology in your business to work smarter and faster.

  • A high level stockout dashboard can predict when an in-stock item will stock-out before the next order is received. This data gives you the time needed to rectify the situation BEFORE it becomes a stock-out problem.
  • Placing emergency orders or expediting existing orders is required to prevent these items from stocking out.
  • Forecast variance management. The potential stock-out dashboard and other calculations are only as good as the forecasts. Therefore, forecasts must be re-aligned to the real market demand as soon as any changes are identified.
  • A supplier order expediting system that identifies orders close to their expected delivery date and most definitely identifies overdue items.

The best way to ensure that you stay on top of stock-outs is to invest in a proper inventory management solution – like NETSTOCK.  Trying to manage your inventory in a spreadsheet is time-intensive, and you won’t get the same results that you would from a fit for purpose solution. It’s important to weigh up the cost and reputational damage as a result of stock-outs versus investing in an inventory management solution which helps with stock-outs AND helps you minimize your excess stock by placing smarter orders. This all goes to ensuring that you have the right products in the right locations at the right time – every time!

Free webinar 

24th of November 2020

If stock-outs are one of your inventory challenges, attend our free webinar in partnership with NETSTOCK  and learn how to Optimise Inventory Management and Improve Planning Efficiency.

If you need any more information on, Inventory Management Software, stock-outs or NETSTOCK, contact us here 1300 857 464 or send an email to [email protected]