Excess inventory: 6 steps to cut your losses
Read time: 3 minutes
Excess inventory can tie up a lot of capital and storage space. But dumping it can feel like you’re throwing money away, and that makes it a tough call.
A little planning can help you minimize your losses and avoid excess inventory in the first place, says Lucie Le François, a BDC Business Consultant who advises entrepreneurs on inventory management and operational efficiency.
“It’s a hard decision that people postpone because no one wants to take the hit,” Le François says. She recommends these six steps.
1) Put someone in charge—Making someone responsible and accountable for inventory is an excellent way to improve its management. This person’s job can include monitoring inventory, providing input on ordering decisions and identifying slow-moving products.
2) Decide what’s excess inventory—Decide what you mean by excess inventory. Ask yourself what is the maximum time an item can sit on the shelf before action is needed. Your answer may be different for each item.
Take into consideration factors such as the amount of inventory you need to meet customer or production demand. You should also consider supplier lead times, storage costs, item shelf life and how quickly items become obsolete.
3) Set rules—Create rules for what to do with excess inventory. Options include offering customers a discount on overstock, giving sales reps an extra incentive to sell it, selling items to employees at a discount or giving items to a charity or to employees as a job perk.
You can also ask suppliers to take returns. Some suppliers will accept to do so even if you’re past the return window, especially if you’re willing to pay a restocking fee. It often makes more sense to pay a restocking fee than to keep inventory several years.
In the worst-case scenario, consider disposing of items instead of spending money storing them. A write-off can sometimes be cheaper than storing stock that has little prospect of being sold.
4) Identify excess items—Identify which products you have too much of in inventory. Take action first on the ones with the biggest gap between the amount in inventory and your actual needs.
5) Monitor your inventory—Good decisions start with good information. Be sure you have a good picture of your inventory with a system that records the quantities, location, acquisition date and reordering frequency of all items.
“It’s very easy to forget about aging inventory, then one day realize, ‘Woah, we have a lot of stock,’” Le François says.
Proper monitoring helps you avoid the problem. Also, you should regularly check the accuracy of your records by doing a physical count of your inventory and comparing it to the numbers in your system.
6) Analyze the causes—Look into why you wound up with so much inventory in the first place. Is it because of production bottlenecks? Do you order buffer stock because of an unreliable supplier?
Do you order too much because of poor inventory monitoring? Are your orders aligned with customer demand, sales forecasts and distribution capacity?
The answers should help you zero in on solutions. These can include smoothing out production or supplier problems, improving inventory monitoring or removing slow moving items from your product line.