What is excess inventory?
In one of our previous blog posts (What is Excess Inventory?), we discussed excess inventory, defining it as “product that has not yet been sold and that exceeds the projected consumer demand for that product.” We further explained that excess inventory can become a big issue for retailers, that it is a setback, tying up cash flow and representing a loss of revenue. Most importantly, we noted that it can impede a business’s growth and is something that every retailer has to deal with.
But why is this? Why does every retailer have excess? Can it be avoided?
No, not all of it can be avoided. It can be managed, but not all inventory will always have a 100% sell-through rate, meaning that some product will be left over, eg. “excess”.
What causes excess inventory?
Excess inventory can occur at any point during the product cycle as a result of any number of reasons.
There are the uncontrollable factors, such as weather, or even the state of the economy. The weather could change quickly. Think: an 80 degree weekend in February, or an earlier start to a winter season. The state of the economy is a roller coaster ride that no one can predict, making it a variable that cannot be controlled by retailers.
There are also consumer factors, like new trends that rapidly turn into popular demand (think: embroidered jeans, bomber jackets, espadrilles). Or number of returns could vary drastically each season. As inventory becomes less and less desirable by consumers the value of the product drops in conjunction, which could lead to a financial loss down the road.
Finally, there are internal business factors, like shipment delays, technical challenges, or any obstacle that retailers could reach while trying to distribute their product.
How can retailers manage excess inventory?
Each season is different for retailers, making it difficult to make predictions and plan ahead for possible obstacles, causing excess inventory to be unavoidable, for the most part. In a retailer’s ideal world, inventory would cycle through a business’s warehouse rapidly, leaving minimal room for buildup, and no issues with their margins and profitability. However, excess inventory is inescapable, and retailers must plan accordingly and be prepared for these types of challenges.