Controlling inventory levels is critical for any business that sells goods to consumers. Inventory is the reason businesses exist and are able to make money. However, there can be a great deal of difficulty when it comes to managing inventory. Inventory costs money, therefore, if the inventory on hand is way more than customer demand, then there is a problem. Managing inventory is explained simply by having enough supply to meet the demand and perhaps a little bit more in order to keep up in periods when demand is high.
What Happens When There Is Too Much Inventory On Hand?
Inventory managers must ensure that the business is able to sell what is in stock before buying more goods in order to prevent overstocking inventory. A demand forecasting model is used to help business owners know when critical levels are reached. At this point, they will order more goods. Inventory management systems and inventory management software help businesses manage the cycle of sales and inventory replacement.
Some businesses operate using an inventory control model in which they will purchase a number of goods and store them in a warehouse (usually due to better prices for bulk purchases). However, excess stock comes with risks as cash is tied up in inventory and plenty of warehouse storage is needed.
How Does A Company End Up With Too Much Inventory On Hand?
There are two main factors to explain what causes an excess of inventory – internal factors and external factors.
Internal factors are things that the business has more control over. For example, an inventory manager should be qualified to manage the demand and supply levels effectively. If not, there may be mismanagement of stock levels, meaning the business may hold excess inventory.
External factors that lead to excess inventory are components that the business has little to no control over. The most recent example of this is the ripple effects of COVID-19. The Coronavirus pandemic forced consumers to stop making certain purchases due to limited access to goods or in some cases, a scarcity of funds. The businesses that were unable to foresee shocks in demand as a result of Covid-19, and kept purchasing goods as before are now left with too much inventory.
Financial Implications of Too Much Inventory on Hand?
Obviously, inventory is not free, and neither is the storage space. When inventory is sitting in a warehouse, it is not helping improve a business’s profitability. Not to mention, too much inventory on hand ends up costing the business more money as they have to still meet payment deadlines to their suppliers for unsold goods.
When inventory is sitting on warehouse shelves, it ties up cash flow and restricts the business’s operations. In order to get out of this difficult situation, businesses will rely heavily on their sales teams to push the product in the hopes they can reduce inventory to an adequate level. Depending on the situation of the business, this may take some time and negotiation with suppliers for longer payment terms.
Effects on A Business With Perishable Items
When a business sells items that are non-perishable (electronics or books, for example) they are at an advantage. However, when a business selling perishable goods has excess stock, they are pressed for time to sell the goods before they go bad. If the items go bad, the business will have to write off the goods at a loss which can cause severe financial damage to the business. The business will then be forced to invest more money to bring in stock rather than bring in money from sales. Under these circumstances, businesses may have to increase their prices which in turn scares off would-be consumers.
Can It Happen To Any Business?
Any business that sells goods can experience too much inventory on hand. This is why inventory on hand should be strategized carefully at all times. Doing so will help businesses avoid any of the negative ripple effects mentioned previously.
Additional Information: Best practices of inventory management and visibility
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