Striking the perfect balance between supply and demand is a complex dance for any business. If you don’t have enough inventory on hand you risk selling out. Too much, and you’ll be stuck with an inventory glut.
An inventory glut occurs when a company has surplus inventory and the stock of products far exceeds its demand.
Financially, it can lead to significant losses as businesses are forced to sell stock at discounted prices, or worse, write off unsold inventory as a loss. Operationally, excess inventory can clog warehouses, making it challenging to manage new stock efficiently. To top it all off, it poses a serious challenge for sustainable practices, as unsold products contribute to waste and environmental concerns.
In this guide, we’ll explore the main causes of inventory glut, innovative strategies to tackle it, and how working with a 3PL can help reduce inventory risk.
What is inventory glut?
Inventory glut happens when a business is holding more inventory than it can sell in a reasonable time frame. Its cause can be related to poor demand forecasting, changes in global economic conditions, supply chain disruptions, or shifts in consumer preferences.
Inventory glut affects businesses both large and small. In fact, according to a report, two-thirds of retailers had excess inventory during the 2023 holiday season last year. This includes major brands like Foot Locker and Ulta.
The thing is, inventory glut affects sectors differently:
- Ecommerce businesses: An inventory glut often results in heavy discounts and promotional sales, impacting profit margins.
- General retailers: Unsold inventory not only takes up valuable space but also ties up capital that could be used for other operational needs.
- Supply chains: Excess inventory or stock in warehouses can disrupt the flow of goods, and logistics companies may struggle with storage issues, further complicating supply chain management.
Regardless of the sector, inventory glut is never a good problem to have. To properly manage it, businesses need to be proactive in implementing the right strategies and technologies.
What causes inventory glut?
Various factors can contribute to inventory glut. Some, like overproduction and seasonal fluctuations, are within a business’s ability to mitigate with the proper systems. Others, like supply chain disruptions and consumer spending changes, are caused by external factors and not within a business’s direct control.
That being said, let’s further explore the reasons that cause businesses to overstock.
One of the primary reasons for inventory glut is when companies manufacture or purchase more goods than the market demands. This is often due to inaccurate demand forecasting, ordering too much buffer inventory to avoid shortages, or purchasing well above the minimum order quantity to capitalise on economies of scale.
Seasonal businesses often struggle with inventory glut, where demand for certain products is high during specific times of the year. But, excessive stockpiling outside these periods can result in a surplus.
Supply chain disruptions
Black swan events like a global pandemic can create a bullwhip effect on your supply chain and contribute to inventory glut. For instance, during the onset of the COVID-19 pandemic, consumer demand for certain products, such as hand sanitizers and toilet paper, surged unexpectedly.
While many retailers were initially dealing with the pain of stockout costs, they rapidly increased production. However, the next year as panic buying subsided and regular supply chains resumed, demand dropped significantly — resulting in the bullwhip effect.
Economic conditions and consumer spending patterns
Changes in economic conditions and consumer spending patterns can decrease a business’s sell-through rate. For example, an early 2023 report found that nearly 70% of consumers planned on cutting back on nonessential spending. Additionally, inflation reaching a 40-year high level has affected consumers’ ability to afford many products.
Just take the following chart showing a significant rise in year-over-year inventory levels for these major retailers (including Walmart, Target, and other retail giants). As consumers shifted their spending habits, it left many in the retail industry with excess inventory.
Analising the financial implications of excess inventory
As of October 2023, US retailers combined are holding over $795 billion worth of inventory.
Although not all of this is considered inventory glut, it’s safe to assume that at least some of this inventory figure is related to overstocking.
The problem is, inventory glut has far-reaching economic consequences for businesses, impacting their financial health in multiple ways. Understanding these impacts is crucial for effective inventory management and maintaining a healthy bottom line.
Excess inventory ties up capital that could otherwise be used for business development, marketing, or other operational areas. This reduction in liquidity limits a company’s flexibility and ability to respond to market changes.
Additionally, the capital invested in excess inventory represents an opportunity cost, as it is not being used for potentially profitable investments or improvements in other areas of the business.
Storing excess inventory leads to higher holding costs. This includes rent for warehouse space, utilities, insurance, and security.
Moreover, storing certain products for excessively long periods may result in obsolete inventory. Therefore, unaware business owners could be paying storage fees on inventory they may not even be able to use anymore.
Markdowns and discounts
To clear excess inventory, businesses often resort to markdowns and discounts. While this strategy can help move stock, it significantly erodes profit margins. Just take a look at the example below. If you have a 30% margin, and you give a 5% discount, you have to sell 20% more units to make the same profits.
Additionally, frequent discounts can negatively affect a brand’s perception, leading customers to expect lower prices and wait for sales rather than purchasing at full price.
6 innovative strategies to tackle inventory glut
In the face of inventory glut, businesses are increasingly seeking innovative solutions that go beyond traditional markdowns. These strategies not only help in managing excess stock but also provide a cost-effective and sustainable approach to improving their inventory turnover ratio.
1. Inventory redistribution
One effective strategy is to redistribute inventory to locations where it’s more likely to sell. By analising inventory analytics across different regions or stores, businesses can identify areas with higher demand for certain products. This approach reduces inventory days on hand thus, optimising stock levels.
ShipBob’s advanced analytics and distributed inventory solutions enable businesses to strategically move products to fulfilment centers closer to high-demand areas, reducing shipping times and costs.
2. Dynamic pricing strategies
Dynamic pricing involves adjusting the prices of products based on real-time market demand, competitor pricing, and other factors. This option may not apply to all ecommerce businesses but if you’re selling on Amazon, then utilising their dynamic price rules or customising your own is certainly an option.
3. Donations and recycling programs
Donating or recycling unsold products is a sustainable approach to managing inventory glut. This helps in clearing stock and contributes to corporate social responsibility efforts. For example, Designer Brands donated five million pairs of shoes to Soles4Souls, a global nonprofit.
These types of initiatives can enhance a company’s brand image and customer loyalty. Plus, donations can often be written off, providing a financial benefit.
4. Collaborative promotions and partnerships
Collaborating with other brands for joint promotions can help move excess inventory. This can include bundled offers or cross-selling with complementary products from partner brands.
These partnerships can open up new customer segments and markets, providing a fresh avenue to offload surplus stock.
5. Implementing flash sales and pop-up events
Organising flash sales or pop-up events can create a sense of urgency and exclusivity, encouraging customers to purchase. These events can be particularly effective in clearing inventory quickly.
With ShipBob’s agile fulfilment services, businesses can rapidly deploy products for these events, ensuring timely delivery and customer satisfaction.
6. Subscription boxes and mystery packages
Offering surplus inventory as part of subscription boxes or mystery packages can be an appealing way for customers to receive value while helping businesses clear stock.
This strategy not only addresses inventory glut but also boosts customer engagement, as customers enjoy the surprise element.
ShipBob leaves inventory glut in the dust
ShipBob is revolutionizing the way businesses handle inventory management. By offering sophisticated inventory optimisation solutions, ShipBob assists businesses in predicting, preventing, and efficiently managing inventory glut.
The core of ShipBob’s service lies in its cutting-edge technology, which enables precise demand forecasting and proactive inventory management.
Success stories with ShipBob
Numerous ecommerce businesses have successfully combated inventory glut by partnering with ShipBob. For instance, MDacne, a skincare company, leveraged ShipBob’s analytics tool for efficient inventory reordering.
“ShipBob’s analytics tool is also really cool. It helps us a lot with planning inventory reorders, seeing when SKUs are going to run out, and we can even set up email notifications so that we’re alerted when a SKU has less than a certain quantity left. There is a lot of value in their technology.”Oded Harth, CEO & Co-Founder of MDacne
Leveraging the right technology is what separates businesses that can accurately forecast inventory requirements from those that can’t. ShipBob’s real time inventory management system ensures you can see exactly how many units of each product is in each warehouse. This provides better visibility overall, allowing you to maintain healthy inventory and safety stock numbers without overstocking.
“With ShipBob, we have access to live inventory management, knowing exactly how many units we have in each fulfilment centre. This not only helps with our overall process in managing and making sure our inventory levels are balanced but also for tax purposes at the end of the year.”Matt Dryfhout, Founder & CEO of BAKblade
Building resilient and agile supply chains
The importance of having a resilient supply chain cannot be overstated. In a continuously changing environment, even the slightest disruption can trickle down and wreak havoc on your logistics planning.
That’s why ShipBob helps strengthen your supply chain by offering distributed inventory solutions, an advanced data and analytics tool, as well as expert advice. Distributed inventory enables companies to store their products in multiple locations, reducing the risk of regional disruptions impacting the entire supply chain.
Meanwhile, ShipBob’s advanced data and analytics tools provide valuable insights for inventory management, helping businesses make informed decisions about stock levels and distribution.
The role of AI and machine learning in predicting demand
The integration of AI and machine learning in inventory automation has dramatically improved demand forecasting accuracy. ShipBob’s use of these technologies allows for sophisticated analysis of sales data leading to more accurate predictions of inventory needs.
This advanced forecasting reduces the likelihood of overstocking and understocking, ensuring that businesses have the right amount of inventory at the right time.
Inventory glut FAQs
Below are answers to common questions about inventory glut.
What are the common causes of inventory glut?
Inventory glut commonly occurs due to inaccurate demand forecasting, where businesses produce or order more stock than needed. Other causes include supply chain disruptions leading to untimely or excess deliveries and shifts in market trends or consumer preferences.
How does ShipBob’s platform specifically address inventory glut issues?
ShipBob’s platform tackles inventory glut by offering advanced analytics for demand forecasting and inventory control. It helps businesses track inventory levels in real-time, set up alerts for low stock, and strategically distribute inventory across various fulfilment centers to align with demand.
What are some creative strategies to deal with excess inventory?
Creative strategies for managing excess inventory include redistributing stock to high-demand areas, implementing flash sales or pop-up events, and repurposing or recycling products. Businesses can also explore partnerships for joint promotions or bundle products to encourage sales.