5 Major Causes Of Retail Overstock

There can be very little difference between understocking and overstocking when it comes to retailing. Of course, you want to ensure that you have enough products to meet demand, offer a great in-store customer experience, and avoid suffering the effects of stock out. However, you don’t want to stock too much of the wrong product and start making losses on items you are unable to sell. Both situations come with significant problems and understanding the causes of understocking and overstocking are vital to make sure you earn a profit. Understanding what your customers want, preventing overstocking, and knowing how to manage stock out situations can be the difference between making a profit and making a loss.

Essentially these two issues can be explained as such:

• Understocking is when your supply of a particular product fails to meet consumer demand. So a customer enters your store, wants to buy a product which you no longer have. Now there are many reasons why a product might be out of stock but if customers have repeated problems trying to purchase from you eventually they will leave for a competitor.

• Meanwhile overstocking is the exact opposite. Having too much of a product that exceeds consumer demand. Overstocking can have even more severe ramifications on your business and can cause significant losses if it gets out of hand.

These problems can occur to any business, even industry leaders and global giants can fall into trouble because of overstocking. Recently, clothing brand Ralph Lauren saw their inventory system become so convoluted that their profits plummeted by half meaning they had to refocus only on the brand’s best-selling labels, cutting multiple lines of clothing and closing 50 under-performing stores.

This shows that improper stock management can have damaging effects on your retail business. So when it comes to overstocking, it’s important to ask yourself the question, how do I deal with retail overstock while understanding just what causes overstocking can significantly benefit your business, especially if you are looking to grow and expand.
<h2″>The 5 Main Causes of Overstocking in Retail

Knowing how to prevent overstocking begins with understanding what the main causes of it happening are. Let’s take a look at the five main reasons that lead to businesses suffering from having too much stock at one time.

1. Not Understanding Consumer Demand

Before you can even begin to order products, you need to understand who your customers are and what they want. This will help you better predict their needs and which products might be in high demand. Knowing your customers is the first key aspect of being successful. Research into what products they want, what they can afford, what style of product they would prefer, how much they are willing to spend, and any other piece of information, insights, or data you can gather on them. So if you find that your customers want luxury products, stocking brands that are cheaply made, packaged, or presented are unlikely to sell and you will be left with the problem of surplus stock.

Look at your current sales trends, delve into the sales data you currently have, research your direct competitors, or even ask customers yourself to see what you need to do to give them what they want. Anything you can glean that can help understand demand will allow you to avoid overstocking issues.

2. Leftover Sizes

With fashion retail, in particular, most items for sale will be delivered in evenly distributed sizes. Even if you can account for some flexibility when purchasing your products, it can be difficult to determine what the correct size distribution should be when ordering. If you haven’t done research into the variety of speeds at which different sized goods sell at, it will lead to you overstocking on the unpopular sizes and being stuck with a product that is increasingly difficult to sell. This needs to be factored into your approach when buying your products, if not, it can lead to financial difficulties as your company will be burdened with unpopular items.

3. Failed Promotions

Retailers run many promotions every year and they are a great opportunity to create buzz and intrigue around your products that can lead to increased sales and conversions. However, the problems begin to show when they are undertaken without any research or analytics that display how they will be successful and will relate to your inventory levels. If there is no demand for the products you are trying to sell, these promotions can have adverse effects on your inventory, and overstocking becomes a severe problem with serious financial implications. Building promotions around customer demand and your current inventory can be great ways to support your business, however, it is the research before this that is the crucial stage, not the promotion itself.

4. Stock as a Safety Buffer

As a way to avoid the dreaded out-of-stock situations that can harm a retailer, many companies will stock extra products that go above and beyond what they assume they will need. If you are looking to use your stock as a safety buffer, accurately predicting what and how much you require is an important, if tricky proposition. There are many factors that need to be considered that can influence customer demand but having too much stock to protect from running out can easily lead to overstocking. If done incorrectly, it can mean that you end up having to shoulder a high cost as well as potential markdowns to try and move products.

5. Inaccurate Data

Accurate data should be a key priority when it comes to your retail business and it can be frighteningly simple to have inaccuracies when dealing with inventory. Between shipment variances, misplaced products, returns, stolen goods and any number of other factors, it can be increasingly difficult to know the exact number of goods you need in your inventory at any one time. This can lead to inaccuracies which can cause problems regarding ordering more than you need and causing overstocking issues. Taking the time to be accurate with your data is worth it in the long run.

The Pros and Cons of Having Surplus Stock

Having surplus stock is not inherently a bad thing but it is about finding the right balance between too much and not enough. Here are some of the pros and cons when it comes to potentially having more stock than you need:

Pros:

Faster Response Time –  You are able to easily and quickly fill customer orders when they come in. By having extra stock you can process these orders without worrying about waiting for stock or having to delay shipment. Through having surplus stock you are able to help customers quickly, efficiently, and provide a high level of service to them.

Lower Risk of Stock Shortage – By keeping additional stock on hand, you pretty much guarantee you won’t run out of a particular item. If there is an increased demand for a specific item, you will be able to meet it and give your customers what they want.

Easy to Replenish – By keeping an excess inventory, your physical store locations will always seem full and inviting. It can put customers off if they see a store with empty shelves or areas where no products are, therefore having surplus stock ensures that your store always looks neat, well-stocked, and visually appealing.

Cons: 

Cash Flow – It’s a simple equation really: the more inventory you have to hand, the greater the amount of capital you have tied up in it. This can slow down your cash flow if you are having to hold on to extra stock that isn’t selling.

Obsolete Stock – The value and quality of a product decrease the longer you have to keep hold of it. It should be a priority to sell your products while they’re new to the market otherwise they will depreciate in value. You may even have to sell products at a loss just to help clear your inventory.

Higher Storage Costs – Excess inventory requires extra space for storage. This extra space means extra costs, and this all has to be factored into your final price which may put off potential customers if it becomes too high.

Tips on How to Avoid Retail Overstock                                           

So, how can you avoid suffering from overstocking? Well there are some ways you can help stay on top of your overall inventory levels such as:

Set Minimum and Maximum Inventory Levels – Having a minimum level for your inventory is vital to providing a good service. Maximum levels may fluctuate based on trends, seasons or sales but having a minimum level and sticking to it rigidly is key. Assess your sales date to determine what these levels should be and continually evaluate them throughout the year, by doing so you can avoid being stuck with too much stock as you always know exactly what you need to order.

Conduct Regular Audits – Inventory audits should be conducted on a regular basis. This is a simple and effective way to correct any inaccuracies and spot any problems before they get out of hand in relation to an overstocking scenario. Be accurate and thorough in your audits and you will see the financial value of them

Use One System For Recording Inventory – There should be a singular location or system that is used by your business to record inventory information. By having it in one place it means that the information is more accurate whilst also being readily available for anyone in your organisation to find and understand what products are needed.

Use Predictive Analytics and AI – Predictive analytics and AI can help retailers solve their overstocking issues effectively. These systems can help calculate demand forecasts with greater accuracy, assess stock levels before they become problematic and optimise your entire retail operations in a cost-effective way.

Final Thoughts

As a retailer, when it comes to your inventory levels, it’s about finding the right balance between too much stock and too little. Having too little stock can cause you to run out quickly and miss out on potential business while having too much can be a drain on your financial resources and leave you saddled with products that are unable to be sold. However, by avoiding the main causes of retail overstock and following the simple tips mentioned in this article, you will be able to optimise your stock inventory levels and grow your business in a quick and cost-effective manner.

This blog post is written by David Pittaway, he is a creative content writer for the London based creative web design agency Appnova who specialise in luxury branding, bespoke digital marketing strategies and eCommerce solutions.