Excess Inventory Definition
Excess inventory is product that has not yet been sold and that exceeds the projected consumer demand for that product.
It usually represents some type of mismanagement of stock demand due to factors such as over-buying, inaccurate projections, cancelled orders, a bad economy, unforeseen weather changes, or late or early delivery of goods.
Why Does Excess Inventory Exist?
Excess inventory is the result of a number of disruptions in the product cycle. These factors can be broken down into three categories:
60% Shipment delays - Delays due to factors like processing times, order frequency and international regulations.
25% Technical challenges - Issues caused by system integration, purchase orders, EDI processing and lack of visibility into business.
15% Other factors - For example returns or quality requirements.
What Are the Disadvantages of Excess Inventory?
Excess inventory presents a number of issues relating to waste, storage and additional costs. However, the two main disadvantages of excess inventory are:
1. Excess inventory ties up cash flow.
A company acquires inventory for the purpose of reselling the merchandise at a profit turning that inventory into cash that can be used to pay the day to day expenses of the company. Excess inventory decreases this cash flow by holding the cash in goods form and preventing it from being put to use elsewhere.
2. Excess inventory represents a loss of revenue.
Excess merchandise loses value the longer it is held in stock, as the demand for that product diminishes, and it takes “shelf space” away from a newer product with perhaps a higher profit margin. Additionally, holding costs for excess inventory such as warehousing, insurance, and taxes, further diminish profits.
Excess Inventory and Inventory Turnover
Inventory turnover measures how quickly a business is selling inventory and how this compares against industry averages. A low turnover suggests poor sales and therefore excess inventory, whilst a higher turnover indicates strong sales, big discounts, or indeed both.
Working out your inventory turnover is a good way of establishing what items are reducing your cash flow and unnecessarily costing your business.
Is Excess Inventory Good or Bad?
Not only does excess inventory restrict cash flow, but it also loses the company money each day. When hundreds of thousands of dollars are tied up in inventory, it’s a big deal for a company and can tremendously impair the business’s growth. Needless to say, excess inventory can heavily restrict a business, and is therefore typically a negative.
How Do I Sell Excess Inventory?
This is where off-price can help. To help gain back money that would otherwise be tied up in stock or spent on holding costs, items can be sold off-price. Excess inventory is an inevitable part of retail, but by selling excess products on to off-price retailers, brands can recover revenue that would otherwise be lost, thereby helping them to hit their margins.