Excess Inventory: Ultimate Guide (+8 Management Strategies)

It’s important to understand that excess inventory is often the result of overestimating customer demand or unexpected market fluctuations.

Forecasting demand is not always in your control, but excess inventory can drain margins and decrease efficiency in the supply chain. The best way to mitigate these risks is to apply data-driven strategies to identify where your inventory levels are misaligned and implement effective management strategies for just-in-time (JIT) or lean inventory.

In this article, we’ll break down why excess inventory can harm your bottom line, explore eight strategies you can use to streamline your inventory, and share tips on preventing overstock so you can reduce storage costs, increase cash flow, and decrease supply chain disruptions.

What Is Excess Inventory?

Excess inventory is stock that a brand is holding beyond its current demand. It occurs when products are over-ordered, demand forecasts are inaccurate, or sales slow down unexpectedly, resulting in a low turnover rate. Excess inventory ties up capital, increases storage costs, and risks obsolescence or spoilage. Managing excess inventory effectively is a crucial aspect of proper inventory management and key to optimizing cash flow, reducing waste, and maintaining a lean supply chain that responds flexibly to market demands.

3 Main Causes of Excess Stock

According to a recent study by McKinsey, brands are increasingly shifting their approach to inventory management, opting to hold onto less stock than in previous years. The study highlights a notable change between 2019 and 2022, with only 45% of respondents in 2022 saying they were likely to hold onto inventory, compared to 55% in 2019. This shift signals a growing recognition of the risks and challenges associated with maintaining excess stock, including rising storage costs and inefficiencies.

One of the main reasons cited for this change is limited storage space. As e-commerce continues to grow, many businesses are finding that their warehousing capacities are stretched thin. This makes it difficult to justify keeping large amounts of inventory on hand, especially when demand forecasts are volatile or unpredictable. Additionally, the cost of real estate for warehouses has seen several significant swings in recent years, making cost-benefit analysis of carrying excess stock challenging to say the least.

There are several causes of this trend that are shared across industries. First, supply chain disruptions paired with volatile consumer demand have made it harder for companies to predict lead times and inventory needs accurately. With uncertainty around how quickly goods can be sourced and delivered, businesses are hesitant to over-order. Instead, they focus on maintaining leaner inventories to stay agile and responsive to sudden shifts in demand.

Additionally, fluctuating consumer preferences have forced companies to be more cautious about carrying excess inventory. Consumer spending power is variable and preferences for value vs luxury goods varies by industry. In times of economic uncertainty, historical sales data is less relevant to demand forecasting, often resulting in overbuying a product category that may have fallen out of favor in the current market.

The McKinsey study underscores a clear trend in which brands are moving away from holding excess inventory due to factors such as limited storage space, supply chain unpredictability, and changing consumer behaviors. To remain competitive, businesses are adopting more agile, data-driven strategies to optimize their inventory levels and minimize the financial and operational burdens of surplus stock.

Demand Forecasting Errors

One of the most common errors that leads to excess inventory is misjudging customer demand, leading to slower than expected inventory turns. Slow-turning inventory ties up valuable warehouse space that could otherwise be dedicated to fast-moving, revenue-driving SKUs. This dual burden of missed sales opportunities paired with excessive inventory carry costs can seriously impact profitability. This is why proper demand forecasting should be a top priority for brands of all sizes.

Why demand forecasting errors happen:

• Relying on inaccurate data: Any data process is only as accurate as the data it ingests. Human error, poor inventory management, siloed data from multiple sales channels, and limited sales history can lead to inaccurate or limited data sets and poor forecasting.

• Failure to factor in external factors: Only relying on your own historical sales data can lead to inaccurate forecasting. Be sure to consider macro-economic factors as well as industry trends. Purchasing third-party data or working with a partner with access to broader data sets can enable more accurate forecasting.

• Over-reliance on rigid statistical models: Some factors cannot be accounted for in a statistical model. Be sure to include promotional schedules, major sales events, and cyclical demand patterns in your demand forecast.

For example, if your business ran a high-volume promotion like a feature on the Good Morning America Deals & Steals segment, you would want to pull that sales volume out of your forecasting model if you didn’t plan on running the promotion again. Otherwise, you may end up overestimating consumer demand.

Purchasing Inventory in Bulk

It can be tempting to prioritize top-line savings by bulk ordering from your suppliers. However, top-line savings may not always translate to bottom line profitability if inventory turns too slowly. According to the Federal Reserve Bank, most retailers have pulled back on safety stock, opting for a more lean inventory strategy. In fact, the average inventories to sales ratio in the US was 1.31 in May 2024. This indicates a general trend towards more of a Just in Time (JIT) inventory management strategy across the retail sector.  

There are two primary reasons purchasing inventory in bulk can lead to excess inventory: 

• Product life cycle: It’s important to understand the changes in demand after a product is introduced to the market. Market saturation and waning consumer interest can lead to inappropriate procurement strategies, especially at the maturity and decline stages of a product life cycle.

• Changes in market demand and consumer preferences: As the recent economic climate has shown, consumer preferences have pivoted from value products to premium, and discretionary spending has changed based on product category. It’s important to take these broader market changes into consideration before stocking up on a historically popular product.

For example, D2C mattress brands saw a major explosion when they were first introduced to the market. Eventually, most consumers who wanted a home delivery mattress had already bought one. D2C mattress brands had to change their procurement strategy to pivot towards accessories and complimentary home goods rather than over-ordering their core product.

Low Turnover Rate (100 words)

Inventory turnover rates vary by industry, but generally speaking, most businesses aim to sell through their stock 1-2 times per quarter. A slower inventory turnover than this may cause inflated inventory carry costs where storage costs erode margins.

What causes low turnover rates:

• Overestimation of demand on popular products: It can be easy to overestimate demand on your best sellers, which is why it’s important to consider product lifecycle and do a SKU level analysis on your top movers before placing an order with your supplier.

• Increased competition: If you are early to market in an exploding product category, expect that other businesses will jump on the bandwagon. Be sure to do a thorough competitive analysis as part of your demand forecast.

• Issues with product range or quality: Especially in consumables, product range and quality can greatly affect demand. If consumers are disappointed in your product after their first purchase or looking for more variety, they are unlikely to make a repeat purchase. This can lead to an overestimate of demand and ultimately drive excess inventory.

What Impact Does Extra Inventory Have on Business Owners?

Excess inventory is a drain on profitability and efficiency. Some results of carrying too much inventory for too long include:

1. Depleted Margins

Inventory carry costs can drag down the profitability of sales. Long-term storage rates add up and may eventually outweigh the return on an eventual sale.

2. Inventory Shrinkage

The more time products spend in storage or on the sales floor, the more likely they are to be damaged, lost or stolen.

3. Missed Sales Opportunities

Merchants and retailers have limited amounts of space. Aging or obsolete inventory takes up valuable space that could be used for storing new products that sell at a higher velocity.

4. Decreased Working Capital

Inventory is a major investment, and every item that’s sitting on a shelf represents capital that could be invested back into other areas of the business.

How To Identify Surplus Stock That’s Leading to Higher Inventory Costs (add 250 words)

Identifying the root cause of excess inventory is crucial to reducing unnecessary inventory costs and optimizing your supply chain. A thorough root cause analysis can help pinpoint the cause, whether due to poor forecasting, over-ordering, or seasonal fluctuations. Addressing these factors will allow you to take actionable steps to prevent surplus in the future.

Step-by-Step Process for Identifying Surplus Stock:

1. Analyze Your Inventory Turnover Rate: Use the Inventory Turnover Ratio (Cost of Goods Sold ÷ Average Inventory) to measure how frequently your inventory is sold and replaced over a given period. A low turnover rate indicates you may be carrying a surplus.
2. Conduct a Sales Data Analysis: Review your sales data regularly to identify products with consistently low sales. Look for trends on a SKU-level, as you may find that an overall popular product category is only selling in a single color or size.
3. Monitor Inventory Aging: Track the age of products in your inventory. Items that have been sitting for more than 6-12 months are likely excess stock, and holding on to them could lead to higher storage costs and product obsolescence.
4. Review Your Seasonal Stock Levels: Assess how seasonal products performed during their peak sales periods. Items that didn’t sell as expected are likely contributing to your surplus and should be flagged for review.
5. Evaluate Your Storage and Holding Costs: Compare your current storage and holding costs with previous periods. If certain inventory items are taking up significant space but aren’t selling at a sufficient rate, they may be part of your surplus.
6. Conduct a Physical Inventory Audit: If you’re not partnered with a reliable warehousing provider like Ware2Go, schedule regular physical counts of your inventory and compare them with your digital records. This helps identify discrepancies that could reveal surplus stock.

5 Excess Inventory Solutions to Help Restore Healthy Stock Levels (add 750 words)

Large retailers are taking one or more of three approaches to excess inventory management.

1. Move Excess Inventory to Deep Storage (add 100 words)

Retailers like the Gap and Kohl’s will move some basics and non-seasonal items into storage in hopes of selling them later when demand improves.

Advantages of using deep storage:

• Efficient space utilization in your main warehouse: Fulfillment centers and primary warehouse locations should be optimized for fast-moving products. Getting slower movers out of the way enables you to better use premium space for revenue-driving SKUs.

• Increases warehouse efficiency: Different types of warehouses are optimized for different processes. Keeping slow-moving inventory in deep storage or in a large distribution center enables warehouse staff and processes to work at optimal levels.

What you need to be aware of:  

• Risk of long-term storage costs: The risk with storing excess inventory is in racking up long-term storage that may end up costing more than you could ever make back on a sale.
• Potential obsolescence of stored goods: At some point, even less expensive deep storage costs can add up. It’s important to understand when you may be paying more for storage than you could potentially make back on a sale and move those goods out of storage, either through sale or liquidation.

2. Offer Discounts and Promotions (add 100 words)

Amazon kicked off the holiday shopping season early this year with their second Prime Day. Many major retailers followed suit, rolling out Black Friday deals earlier and extending them longer.

Retailers are using heavy discounts to drive demand in the face of inflation and hoping that strong holiday spending will clear out some excess inventory. Similar tactics for managing excess inventory include offering buy one get one (BOGO) deals, kitting popular items together in discounted bundles, and offering mystery deals or grab bags of slow-moving items.

Advantages of using discounts and promotions:

• Can lead to a quick reduction in inventory levels: Deep discounts tap into consumers’ tendency towards perceived value purchasing and can quickly reduce inventory levels and inventory carry costs.
• Can be aligned with high consumer demand periods to maximize sales: Deep discounts, when paired with highly visible promotional events like Amazon Prime Days, can drive even higher volume sales on previously slow-moving inventory.

What you need to be aware of:  

• Ensure discounts don’t excessively reduce profit margins: If you’re offloading inventory you’ve been holding for too long, you’re already at risk of severely impacted margins. Strike a balance of finding a price point that drives sales without taking too much of a hit on your bottom line. Otherwise, you may want to consider a tax write-off.

• Impact on order fulfillment processes: High-volume sales can throw a wrench in day-to-day operations. Be sure to plan ahead and communicate major sales events with your fulfillment partner to ensure a positive customer experience.  

3. Liquidate Your Excess Inventory

Liquidating excess inventory helps clear up space on the shelves and create a more streamlined customer experience. Although this is an aggressive measure of clearing out excess inventory, which in the short-term may damage profits, in the long-term, it enables brands to replenish stock for in-demand categories.

Immediate Cash Flow Relief: Liquidating excess inventory can provide a quick infusion of cash, which can be reinvested into more profitable areas of the business or used to address urgent financial needs.

Rapid Space Reclamation: By clearing out surplus stock, companies can free up valuable warehouse space, allowing for better use of storage resources and more efficient inventory management.

What You Need to Be Aware Of:

Long-Term Brand Impact: Frequent or poorly managed liquidation sales may harm your brand’s reputation by signaling to customers that your products are overstocked or less desirable, potentially affecting future sales.

Strategic Timing and Channels: It’s crucial to choose the right timing and sales channels for liquidation to maximize returns and minimize any negative impact on your regular sales channels and customer perception.

4. Repackage and Bundle Products

Sometimes products just need to be presented to consumers in a different way in order to drive demand. Repackaging products can mean breaking up multi-unit single-SKU packages and repackaging them as a variety pack. Bundling products can mean offering complementary SKUs or accessories along with a larger purchase. This can give consumers a fresh perspective on older offerings or introduce them to products that they may have otherwise overlooked.

Advantages of bundling products:

• Optimizes pick-and-pack efficiency: Multiple-unit orders make more efficient use of order pickers’ time, and with the right fulfillment provider, you can realize economies of scale if pricing structures are such that additional picks drop in price after the first.
• Improves stock rotation: Pair slower-moving items with high-demand products helps you clear stock quickly and gives customers the perception of added value.

What you need to be aware of:  

• Potential profit margin drops: Consumers expect to get a deal when purchasing bundled products. Be sure to price bundles to preserve margin while still giving consumers the satisfaction of getting a deal.
• Customer perception of your product: Consumers may feel slow-moving products are being forced upon them or have the perception that your brand is unable to offload older products if they seem to be out of season or dated.

Ultimately, product bundling and repackaging is a great strategy for brands looking to clear out excess stock, especially if they have slow-moving SKUs that can easily be paired with faster-moving products.

5. Donate Excess Inventory

Donating excess inventory is a great way to quickly decrease inventory carry costs, use your company resources to benefit those in need, and benefit from tax write-offs.

Advantages of using donating inventory:

• Potential tax benefits: While donating inventory may not drive top-line revenue, it can help you offset operating costs and improve your bottom line if you partner with a non-profit that enables tax write-offs for donations.
• Positive PR: Using your excess inventory to benefit those in need can build brand affinity and align with corporate responsibility goals. Many non-profits will share large donations from brands in press releases and on social media.  

What you need to be aware of:  

• Cost and logistics of handling transport: Some organizations may arrange for pickup of your goods, but you may be responsible for managing and paying for transport yourself.
• Compliance with tax regulations: Be sure to check all tax regulations in terms of the value of your goods and how to claim donations when filing.

How to Prevent Excess Inventory and Maintain Inventory Control

After dealing with the effects of excess inventory, many merchants are taking a critical look at their end-to-end supply chain to prevent the buildup of slow-moving products in the future.

Implement Demand Forecasting

Merchants of all sizes should take a critical look at their demand forecasting methods. A mature demand forecast will include not only historical sales data but industry trends as well as marketing and promotional schedules.

Merchants should also have an understanding of where their inventory should be staged in order to offer the best, most affordable shipping options to their customers. Distributing inventory closer to end customers lowers time in transit (TNT) to control delivery costs and optimize customer experience.

How to implement demand forecasting:

1. Gather Historical Data: Start by collecting past sales data, customer trends, and market research. This provides a foundation for identifying demand patterns and making informed predictions about future sales.
2. Identify Key Variables That Influence Demand: Determine factors like seasonality, economic conditions, and promotional activities that impact demand. Recognizing these variables helps create more accurate and dynamic forecasts.
3. Choose a Forecasting Method: Select a method, such as time series analysis or causal models, that best suits your product type and market conditions. The right method ensures your forecast aligns with your business needs.
4. Segment Your Products: Group products by categories like demand volatility, lifecycle stage, or profitability. Segmenting helps tailor forecasts more precisely to different product types, reducing errors.
5. Collaborate Across Departments: Work closely with sales, marketing, and supply chain teams to ensure all relevant data and insights are considered. Cross-departmental collaboration enhances the accuracy and alignment of forecasts.
6. Test and Validate Your Forecasts: Regularly test your forecasts against actual sales and adjust them as necessary. Validating forecasts ensures they remain accurate and adaptable to changing market conditions.

Prioritize SKU-Level Strategy

When you look at your top sellers at the SKU level, you may be surprised to learn that, within your top-moving product line, only one of four colorways is selling at a profitable rate. Deprioritizing the slower-moving colors will allow you to increase volume of the fast-moving SKU for better margins and a more streamlined supply chain.

Adopt a Just-in-Time (JIT) Inventory System

A Just-in-Time (JIT) inventory system is a procurement strategy where goods are produced or ordered only as needed, keeping inventory carry costs to a minimum and enabling brands to respond more efficiently to changing demand.

Why it Prevents Excess Inventory: JIT ensures that inventory levels remain low, which prevents overproduction and reduces the risk of excess stock. By aligning production schedules closely with demand forecasts, businesses can avoid the costly storage and management issues that come with surplus inventory. This lean approach also promotes operational efficiency and reduces waste.

How to Adopt a JIT System:

1. Assess Demand Forecasting: Ensure your demand forecasts are accurate to avoid stockouts or over-ordering.
2. Partner with Reliable Suppliers: Develop strong relationships with suppliers and freight forwarders to keep inbounds on schedule.
3. Streamline Inventory Management: Implement inventory tracking software to monitor stock levels in real-time.
4. Improve Communication Across Teams: Ensure close coordination between production, procurement, and sales and marketing teams.
5. Implement Continuous Improvement: Regularly review and optimize the JIT process to enhance efficiency and meet evolving customer needs.

Use the First-In, First-Out (FIFO) Method

The First-In, First-Out (FIFO) method is an inventory management approach where the oldest stock (first in) is sold or used first (first out). FIFO is especially effective for products with expiration dates, such as perishable goods, but it can also help manage non-perishables by preventing obsolescence.

Why it Prevents Excess Inventory: Using the FIFO method ensures that older stock is prioritized for sale or use, which prevents inventory from sitting on the shelf for too long. This helps avoid obsolescence, spoilage, or depreciation, reducing the need for markdowns or write-offs. By moving stock efficiently, businesses maintain a healthier cash flow and minimize excess inventory.

How to Use the FIFO Method:

1. Organize Inventory by Arrival Date: Arrange products so that the oldest items are more accessible, both in physical warehouses and digital systems.
2. Track Expiration Dates: Use inventory management software to monitor the age and expiration dates of products.
3. Regularly Audit Inventory: Conduct regular inventory checks to ensure products are being rotated correctly.
4. Train Staff: Ensure warehouse staff is trained to follow the FIFO method in both physical and digital stock management.
5. Monitor and Adjust: Continuously monitor inventory levels and adjust processes to account for sales fluctuations.

Establish Clear Communication Channels

Effective communication channels are critical for avoiding human errors that lead to excess inventory. Without clear coordination between departments such as sales, procurement, and logistics, you may end up with inconsistent stock levels or misaligned demand and supply. Miscommunication or a lack of timely updates can result in over-ordering, missed sales opportunities, or stockouts.

Why It’s Important: Clear communication ensures that everyone in the supply chain has access to real-time information about inventory levels, demand forecasts, and production schedules. This coordination helps avoid situations where teams order more stock than necessary or fail to sell inventory efficiently, both of which can lead to costly excess inventory.

How to Set Up Clear Communication Channels:

1. Implement Centralized Communication Software: Use standardized communication tools or inventory management systems that integrate with communication platforms to ensure all teams can access real-time data.
2. Establish Regular Cross-Departmental Meetings: Schedule frequent meetings between sales, procurement, and warehouse teams to discuss inventory levels and demand changes.
3. Create Clear Protocols: Develop clear workflows for how and when teams should communicate inventory updates and sales projections.
4. Assign Accountability: Ensure that each department has clear points of contact responsible for relaying inventory information.

Understand Your Risk Tolerance

Ultimately, there are risks associated with carrying either too much or too little inventory. Every merchant must decide their risk tolerance to find the correct balance for their business.

Higher Risk Inventory Management

Businesses with a higher risk tolerance will run a leaner supply chain and carry less inventory. They run a greater risk of stockouts and missed sales opportunities but will realize higher margins per sale.

Lower Risk Inventory Management

Businesses with a lower risk tolerance will carry higher levels of inventory. They will have a lower chance of stocking out, but they will realize lower margins on sales.

How to Balance Risk

In order to find your risk tolerance and strike the right balance for your business, Harvard Business Review recommends evaluating risk at the SKU level based on the following criteria:

1. Sales Volatility

The more unpredictable demand, the higher the likelihood of stockouts. Looking at seasonal patterns of demand will lead to more detailed forecasting.

2. Profit Margin

Higher profit margin yields higher risk because each missed sales opportunity represents a greater loss. You may want to take a more conservative approach managing high margin SKUs.

3. Sales Volume

Higher volumes equate to lower risk because each missed sales opportunity has less impact on overall margin. These SKUs may be right for a high-risk inventory management tactic.

The Next Step for Managing Excess Inventory

Partnering with a technology-first supply chain partner will give you access to supply chain and fulfillment data to drive more informed decisions to prevent issues like excess inventory.

Best-in-class fulfillment technology will aggregate Warehouse Management (WMS), Transportation Management (TMS), and Order Management (OMS) data into high-level reporting that is easy to understand and offers actionable insights for your business.

Looking for a partner to help you simplify your supply chain to drive more profitability in your business? Take a look at Ware2Go’s end-to-end solution today.