How much inventory is too much inventory? Good question. There’s a big difference between buffer stock and excess inventory.
You shouldn't have stock in your storage area that you can't sell. It can chew through your revenue and lead to an increase in shrinkage.
This is especially dangerous in the bar and restaurant industries where margins are lower and products have a shorter shelf life. Regardless of the inventory costing method you use, excess inventory is a problem that needs to be addressed.
What Is Excess or Surplus Inventory?
Excess or surplus inventory is any product in your sitting inventory approaching the end of its life cycle that is not anticipated to be sold. For example, imagine you had 12 kegs on hand at the start of the month that is nearing expiration. On taking the final bar inventory, the bar only went through ten kegs. You have two excess kegs in your sitting inventory.
This issue arises when you don't have an accurate idea of how much product you normally sell or demand shifts suddenly. This draft beer inventory example can be applied to any other product type.
What Causes Excess Inventory? 4 Common Reasons
There are several causes of excess and obsolete inventory. Besides not having an accurate idea of inventory levels and selling slow-moving products, poor purchasing decisions can also lead to carrying excess inventory.
Here are four common reasons for high stock levels:
- Poor Inventory Forecasting: Not having the right data or tools to forecast product demand may result in buying surplus or not enough inventory. Using robust demand planning software, an Oracle ERP system, or a warehouse inventory management tool will eliminate the errors and complicated calculations associated with manual inventory control. Ultimately, it becomes easier to carry out statistical demand forecasting.
- Seasonal Demand: Another reason for excess inventory turnover is when businesses ignore seasonal demand for products. Failing to identify inventory that is affected by seasonal demands will lead to an increase in stock levels.
- Product Life Cycle: At each stage of a product’s life cycle demand for the product will change. For instance, there is usually a high demand when a product is newly introduced to the market. This demand stabilizes as the product reaches maturity and then supply chain demand starts to dwindle and fall off as the product reaches decline. Inventory forecasting needs to consider this and adjust reordering parameters accordingly to prevent an excess amount of inventory sitting.
- Supply Chain Issues: Slight disruptions in the supply chain and logistics industry by even a week or month can lead to sitting inventory and excess stock levels. Most companies overorder stock to keep up with the ever-changing supply chain landscape. This, sometimes, proves to be a terrible decision, leading to increased inventory.
Disadvantages of Excess Inventory
Having excess inventory has many drawbacks for your business and is a major no-no in the world of inventory management. Here are just a few of the ways it keeps your business from being the best it can be.
- Wasted storage space. Excess inventory takes up space in your storage area. This space could be used for products that will actually sell. Depending on the amount of excess inventory, it may even prevent you from ordering other products because you just don't have space available.
- Increased storage cost. There are overhead costs associated with your storage. Anything that you don't sell is taking money out of your pocket. You also have to pay your employees to handle the products and possibly take manual inventory. This drives up costs including prime cost which eats into your profit margin.
- Loss of revenue. This hits in a few ways. First, is a lack of income from the surplus inventory itself. Since you aren't selling the product, which may be wholesale products, you aren't profiting from it. Second, there is the idea of opportunity cost. These unsold products interfere with your ability to sell other products.
- Depreciated and expired products. The product that sits is a product that loses value. In accounting terms, these items are declining in value, so every day you lose profit potential. Worse, expired products are a total write-off and represent unnecessary costs.
How to Reduce and Prevent Excess Inventory
The best way to prevent and reduce excess inventory is to only purchase the products you know you'll use. This can be done by looking at your historical data to understand seasonal trends, calculate usage, and discover your best-selling products. Then establish the correct par level to avoid overordering.
These numbers give you insight into how to maximize your profits and limit losses from excess inventory and waste. This is made simple with the use of a Google sheets inventory template, bar inventory app, or barcode scanner app for inventory since the numbers are at your fingertips 24/7.
If you already have excess inventory, the key is going to be to find ways to get rid of that inventory without taking any losses. One way to analyze this is by doing recipe costing to ensure you're using your stock efficiently.
You can also try merchandise liquidation as another way to prevent excess inventory. Selling off liquidation merchandise or bulk quantities of excess inventory at a lower cost to restaurant wholesalers is a great way to reduce inventory.
How to Dispose of or Sell Excess Inventory Fast
In the restaurant industry, there are a few ways to sell surplus inventory without taking a loss.
- Find other uses for the products. Have ingredients that are going to go bad soon? Use menu engineering to add a new drink or dish that utilizes them. You can even use this as one of your restaurant marketing strategies. Call them specials or limited-time offerings to increase demand and use up that excess stock.
- Sell it off during happy hour. Cutting the price of a product is a classic way of increasing demand. Happy hour is a classic bar promotion that gives you the ability to limit those price cuts and increase demand. You can do the same with an LTO food promotion. Discount prices won't get you as much of a return, but they're a great way to push products that are nearing end-of-life.
- Donate it to a good cause. Any nonalcoholic items you have an excess of may be useful to a not-for-profit. Though you won't see an immediate return, donations have tax advantages for your business. Not to mention you'll build goodwill in your area.
Frequently Asked Questions About Excess Inventory
Having excess inventory is a challenge when you don’t know what to do about it. We’ve reviewed helpful tips and recommendations on inventory control and management. Now, let’s answer some common questions about excess inventory.
How Do You Handle Excess Inventory?
There are various methods to handle excess inventory. However, the best way to handle excess inventory is to have a warehouse inventory management system in place for tracking stock.
Here are six ways to handle excess inventory:
- Bundling product sales
- Remerchandizing and repurposing inventory
- Returning for a refund or credit
- Liquidating excess inventory
- Consigning products
- Donating products
Is Excess Inventory Bad?
Excess inventory can be both beneficial and disadvantageous depending on the type of the inventory. For food service companies, it will be bad to have excess inventory because of the shelf life and the perishability of food items.
Additionally, there is more to spend on storage and an increased inventory carry cost which is bad for business. However, having safety stock is not such a bad idea, especially when you don’t want to be in an out-of-stock situation.
There is a thin line between having safety stock and stocking on too much inventory. Using a solid inventory management system will help you know when you start carrying excess inventory.
How Does Excess Inventory Affect Your Profitability?
Although excess inventory can be a great way to prevent stock-outs, it can also affect your profitability as a business when not handled correctly. Here are some ways excess inventory can affect your profitability:
- Reduced cash flow
- Wasted storage space
- Increased warehouse management cost
Eliminate That Excess Inventory!
Products that sit too long are a liability to your business. Do you find yourself burdened with inventory nearing its expiration? You should quickly act to get it off your books and recoup whatever you can. Then, take action to prevent this from happening again.
If you don't have an inventory management program, you're not making the most informed decisions. The more data and insight you have into your inventory, the less likely you'll run into excess inventory.
BinWise is an end-to-end beverage inventory software solution for bars and restaurants. Save 85% or more of your inventory counting time, eliminate manual data entry, and track variance effortlessly. Book a demo now to see how our platform can improve your bottom line today. Note that product demos are a walkthrough of our software, not a source of business advice.