Cause of Overstocking and How to Avoid it

Many e-commerce or online business customers expect orders to be fulfilled efficiently and delivered on time. If an online business owner runs out of stock, they cannot fulfill orders and will hurt the business.

In an effort to avoid running out of stock, business owners must ensure efficient replenishment of inventory. However, many businesses fail to strategically plan their replenishment and end up stockpiling too much inventory. This is also not a wise decision and can be detrimental to the business.

What is Overstocking?

Overstocking is a situation where you order more items for inventory than you can sell. Thus, leading to excess stock in the warehouse with no prospects for sale in the near future. Not only does this add to storage costs, but it also has the potential to leave you with outdated or obsolete inventory, which can hurt your business.

Overstocking is a situation that is best avoided, but if your business is short of stock it is also an unfavorable situation. Both of these scenarios result in serious losses for your business. Customers will perceive your business as unreliable and this could result in irreversible reputational damage.

The loss due to Overstocking

How will it affect your business if you have too much stock? Here are some of the biggest disadvantages of overstocking:

• Increase of Storage Cost

The cost of holding excess stock is one of the most prominent disadvantages of overstocking. Warehousing costs are not cheap and include not only the cost of renting a warehouse or storage space, but also the labor costs of managing warehouse operations. 

In addition, excess inventory is also a burden in terms of space. Not only spend money to store excess inventory, but also lose money because of the cost of storage space. In fact, with this money, you can save products that sell faster.

• Less capital

When you spend money on inventory, you can return that investment by selling products. That means your money is tied up in excess inventory when there's too much of it. Thus, you have less working capital to run the business and it can become a serious problem in the future.

Initially you don't have the funds to replenish your inventory of selling items and that can lead to lost sales. Also, you can't miss the opportunity to introduce new products that can benefit the business. These things are very dangerous for small businesses that have thin margins and are likely to have a lot of debt, so it will be difficult to recover.

• Losing Products

Many products come with expiration dates. This means that if you can't sell it for a long period of time, it will result in loss of inventory and can lose money. When you overstock, there is a significant risk that you will end up with dead stock. This is especially true for items that are perishable and time sensitive, have a higher risk of expiration or obsolescence.

Why do people overstocking?

The best way to determine if you are overstocked is to look at the inventory turnover rate at the SKU level. A low inventory turnover rate is a sign that you are stockpiling too much. 

This often requires rationalizing the SKU so that you can quickly make a decision to discontinue items that are not selling very well. It's important to know the root cause and how to address why a business would make the decision to stockpile too much.

• Afraid of running out of stock

Not wanting to run out of stock and given the high cost of out of stock, many businesses overreact and end up over-ordering supplies. A business needs to replenish stock in a timely manner by setting up reorder notifications, which allows for inventory reorders before stock runs out.

This can be done by keeping some safety stock or safety stock to deal with unexpected spikes in demand or disruptions in the supply chain. You can also use the safety stock formula to calculate accurately how much safety stock you need.

• Innacurate Inventory Management

Proper inventory management helps ensure that the company always maintains sufficient stock levels while balancing inventory holding costs and purchasing costs. However, human error can result in a lack of visibility or expertise leading to overstocking.

Solution: Invest in e-commerce inventory management software that gives you full visibility into your inventory levels and performance. It will also help you track the various costs associated with sourcing and holding inventory, which will make it easier to properly manage stock and get more inventory on hand.

• Seasonal Demand

Sales volumes can change with seasonal demand so many businesses struggle to plan procurement accurately and may buy too much inventory. This is exacerbated by a failure to strategically price your products or properly promote your brand to take advantage of seasonal buying situations.

In this case, companies need to know exactly how the seasons affect the demand for their business. This will allow them to be strategic with various plans which will make it easier to plan procurements accurately to avoid overstocking.

• Lack of demand projection

When businesses lack insight into future demand, it prevents them from planning accurate inventory procurement. They may not be able to tell when sales for a particular SKU are slowing down and may require a reduction in the number of units to reorder.

Finally, more inventory is ordered than their customers need. Investing in the right demand forecasting tool can help to get an accurate picture of expected inventory quantities. This way, you'll be able to tell if demand is slowing down or predicting a spike in demand.

• Overcompensate for Supply Chain Problems

Many businesses are dealing with out of stock due to supply chain issues such as was the case during the COVID-19 pandemic. Many have changed ordering tactics by overcompensating and stockpiling supplies to avoid disruption.

Businesses should work to build supply chain resilience so that they can quickly recover even in the event of an unexpected supply chain disruption. This can involve working with multiple suppliers, leveraging multiple carriers, distributing your inventory across multiple locations, and relying on logistics experts.

By having the right amount of stock, you can avoid the problem of both overstock and out of stock. You can ensure that consumers get what they need on time and also have stable working capital in the business.

Through the prasmul-eli's program, company executives can share ways to build a business ecosystem strategy related to Supply Chain Management such as omnichannel (offline collaboration with online), cooperation (collaboration with competitors), disintermediation (producers as well as retailers) and resource sharing (use of assets of other parties). ). The goal is that businesses can continue to function optimally to generate value for producers and consumers.