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.
So, how do you combat this issue, and what is the cause? We'll give you these answers and more and help you free up valuable storage space and maximize your bar profitability.
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 are 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 suddenly shifts. This draft beer inventory example can be applied to any other product type.
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, in a lack of income from the surplus inventory itself. Since you aren't selling the product, 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. Product that sits is product that loses value. In accounting terms, these items are depreciating 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 reduce and prevent excess inventory is to only purchase the products you know you'll use. This can be done by looking at your historical data to get an idea of seasonal trends, calculate usage, and discover your best-selling products. Then establish the correct par level to avoid over ordering.
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.
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 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.
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.