Inventory management holds prime importance to any business, especially an ecommerce business. In an attempt to fulfil online orders on time and avoid stockout, brands stumble upon a more serious problem—overstocking.
While every intention to delight customers is right but overstocking can tie up your capital and eat up your profits. That's why avoiding excess stock becomes a necessity.
Don't know how? Don't worry, we've got you covered.
In this blog, we’ll tell you what is overstocking, what causes overstocking, why overstocking is bad for your business, and how can ecommerce brands avoid overstocking.
Overstocking occurs when ecommerce brands store more inventory than they can sell at a particular time. These excess products are also called “surplus stock”.
For example, a brand has 1,000 shirts in its inventory. But their sales velocity is much less, so they are able to sell 500 units and the rest is lying in the warehouse. This excess stock of 500 shirts is called "overstock.”
Here are the causes of overstocking:
1. Fear of stockout
Stockouts, also known as "out-of-stocks,” happen when a business runs out of a product that a customer is ready to buy. Due to the fear of stockouts, ecommerce brands store excess inventory. Not having enough stock may lead to a lost opportunity for a sale. It also has long-term costs associated with it like frustrated customers or an impact on brand reputation. To tackle the situation, ecommerce brands often end up overstocking.
Stockouts cost retailers $1 trillion every year.
2. Poor inventory management
Another common cause of overstocking is poor inventory management. This can occur when brands lack the technology and processes needed to accurately track inventory levels, sales trends, and demand. Without this information, brands may order too much inventory, leading to overstocking.
3. Anticipation of seasonal sales
Ecommerce brands may order excess inventory in anticipation of flash sales, festive sales, or other seasonal peaks in demand. While this approach can help brands meet customer demand during these periods, it can also lead to overstocking if the sales do not materialise as expected.
Overstocking can be detrimental to the success of an ecommerce brand for the following reasons:
1. Excessive holding costs
Holding costs are the expenses associated with storing and maintaining inventory. When an ecommerce brand overstocks, it increases its holding costs because it has more inventory to store and maintain. This can be particularly problematic for small businesses with limited resources because holding costs can quickly eat into profit margins. In addition, holding excess inventory ties up capital that could be used for other purposes, such as investing in marketing or product development.
2. Risk of product expiration
Overstocking can also increase the risk of product expiration. Many products have a limited shelf life, such as food and cosmetics, and if they are not sold before their expiration date, they can no longer be sold. This can result in a significant loss for the ecommerce brand, as they must either dispose of the product or sell it at a steep discount. Moreover, if customers receive expired products, it can damage the brand's reputation and lead to negative reviews and decreased customer loyalty.
3. Limited cash flow
Overstocking can limit an ecommerce brand's cash flow. When a business overstocks, it ties up its working capital in inventory, leaving less money available for other expenses, such as payroll, marketing, and product development. This can be a problem for ecommerce brands that need to invest heavily in marketing and advertising to attract customers and grow their business. In addition, if the ecommerce brand has to discount excess inventory to sell it quickly, it can lead to decreased profit margins and a further reduction in cash flow.
Here are the strategies that can help ecommerce brands to prevent overstocking:
Some ecommerce sellers either don’t track inventory at all or use manual tracking methods. Not only are they time-consuming, but they are also prone to human errors. Inventory management system (IMS) can enable you to track inventory more efficiently and maintain optimum inventory levels. It can also provide you with data to ascertain and establish standard levels and reorder standard inventory levels to help avoid excess stock and unnecessary costs.
One way to reduce the chances of overstocking is by monitoring economic and market trends closely. A simple and effective method to understand market trends is by utilising Google Trends. This tool provides valuable insights to ecommerce brands into product interest over time through various indicators. Thus, alerts from Google Trends will help you stock up according to market conditions, when demand can be high or low based on various factors.
By regularly reviewing inventory levels, brands can identify excess inventory before it becomes a serious problem. It can help you to find out if the physical inventory is equivalent to the recoded inventory in your system.
One of the best options to avoid overstocking is to work with third-party logistics providers. They can be your ally in packaging, warehousing, and fulfilment. With Eshopbox’s Inventory Management System (IMS), you can maintain sufficient inventory at all times. It will enable you to calculate the optimum inventory levels for establishing standard inventory levels to help you avoid excess stock and the costs associated with it. Eshopbox also sends proactive inventory replenishment reminders when you’re running low on stock to ensure uninterrupted order fulfilment. A tech-enabled 3PL service provider like Eshopbox also gives access to an actionable dashboard to provide complete visibility of inventory in real-time.
Flash sales are a great way to sell your excess inventory. You can put products on sale at a substantial discount for a particular period of time. It can help you to sell your inventory fast, reduce the risk of inventory going obsolete and keep a positive cash flow.
Overstocking can be detrimental to an ecommerce brand's success because it increases holding costs, the risk of product expiration, and limits cash flow. To avoid overstocking, ecommerce brands should implement effective inventory management practices. Even help from experts like Eshopbox can enable you to rise above overstocking issues and allow you to achieve long-term success.