What Is Overstock? Tips To Prevent It
by Jaidyn Farar
For ecommerce businesses, maintaining the right inventory levels is a careful balancing act. If you run out of products consumers want, you miss out on potential sales. On the other hand, keeping too much stock on hand ties up capital and leads to a plethora of other problems.
What are those problems? How can your business solve them? And how can you avoid overstocking in the first place? This article will answer these questions and more. Let’s dive in!
What is overstock?
First things first: What is overstock? Overstock happens when businesses order more inventory than their customers want to buy. This surplus inventory sits in warehouses gathering dust, tying up capital, incurring storage costs, and ultimately hurting the bottom line.
Worldwide, overstocking costs businesses (see how it’s this holiday season). In a competitive landscape where consumer preferences can change in a blink, managing overstock isn’t just a matter of tidying up your inventory; it's a strategic move to keep your business agile and profitable.
If overstock is so harmful, why do businesses allow it to happen? We’ll delve into the most common causes of overstocking, then review tactics for preventing it.
Common causes of overstock
No merchant wants to be left with a warehouse full of unwanted products. But unfortunately, it happens far too often. When businesses don’t manage inventory properly, misjudge demand, or overorder products, they can run into overstock situations.
Poor inventory management
Inventory management is the process of ordering, storing, and tracking inventory. The goal of inventory management is to keep inventory levels balanced, so you never run out of a product people want to order () or have too much of a product people don’t want to order (overstock).
Visibility is the key to good inventory management—you should know how much you have of every product at any given time. Without inventory visibility, it’s easy to lose track of what you have and order more, straining both your storage capacity and budget.
Example: Believing they’re low on the latest smartphones, an online electronics retailer places a large order for more, only to discover a hidden stockpile in the warehouse. Many of the phones don’t sell, and after several months they’re out-of-date.
Inaccurate demand forecasting
In simple terms, inaccurate demand forecasting means guessing wrong about what customers want to buy. If you overestimate the demand for a particular product, you'll end up with overstock inventory that may not sell as quickly as anticipated.
Example: A fashion ecommerce store anticipates a surge in demand for denim jackets and orders many of them. However, it quickly becomes clear that consumers aren’t chomping at the bit to get their hands on the jackets, and they don’t sell.
Shifting consumer preferences
Markets evolve quickly. With the internet and social media fueling the latest and greatest trends, consumers often don’t stay interested in products for long. If you stock up on a product that’s trending today, only to find out that consumer preferences have shifted, your business will be left with surplus inventory that’s now out of vogue.
Example: A home decor business invests heavily in brightly-colored furniture, which is all the rage. Before they know it, consumers have moved on to neutral colors, and the outdated hues remain in the warehouse for months.
Many industries have a peak season—a time when demand for their product soars—and a slow season, where demand stabilizes at lower levels. During the busy season, when there's a higher demand for goods, businesses often ramp up their inventory. But if they miscalculate the demand, they may end up with leftovers during the off season.
Example: A sports equipment retailer orders a lot of snowboarding gear, expecting that momentum will continue into the spring season, with late-season skiing and snowboarding activities. Before they know it, all the snow has melted, and they won’t have an opportunity to sell the rest of the gear until the next winter.
Overcorrecting for stockouts
Imagine running out of food at a holiday party—how embarrassing! Next time you host, you’re going to buy a lot more food, right? Many businesses follow a similar pattern, but this strategy doesn’t always work out in ecommerce. Sometimes, businesses panic after experiencing a temporary shortage, and they overcorrect by ordering way too much of the product. While they think they’re being strategic, they’re often setting themselves up for overstock issues.
Example: An online bookstore temporarily runs out of a popular novel, and some customers are upset they can’t order it. Panicking, the store owner orders a significantly larger quantity of the book, resulting in overstock when the initial demand surge subsides.
Compensating for supply chain disruptions
This reason is similar to the one above. Supply chain disruptions often lead to inventory issues for businesses—they may order the correct amount of a product to meet demand, but their suppliers deliver the goods weeks late!
According to this article, the Covid-19 pandemic shook things up for businesses, causing many supply-chain related stockouts (and later, overstocks). “As retailers sought to overbuy inventory to mitigate potential shortages, softening demand and a sudden shift in consumer spending … left them with an inventory glut.”
In short, overbuying products can leave you with surplus inventory once the supply chain stabilizes, putting a strain on your financial resources.
Example: Because of supply chain disruptions, a health and wellness ecommerce store faces delays in the delivery of a popular supplement. Attempting to prevent future shortages, they place a large order for the supplement, only to find themselves with extra inventory once the supply chain stabilizes.
How does overstocking affect my business?
On the surface, it seems like overstocking wouldn’t be as problematic as stockouts. After all, stockouts represent lost sales and frustrated customers. When you overstock, you don’t lose any money … right? Unfortunately, overstocking indirectly causes businesses to lose money by tying up capital in products, driving up storage costs, and leading to expired or obsolete products.
- Less cash flow. Overstocking traps your money in products that aren't moving, hindering your ability to invest where it counts.
- Inefficient warehouse management. It’s hard to maintain an organized warehouse with excess inventory taking up shelf space.
- Higher storage costs. Warehouse space doesn’t come cheap! found that the top reason brands are less likely to hold onto inventory is limited storage space and high holding costs.
- Expired or obsolete products. Perishable goods aren’t the only things that expire. Other products may not “go bad” in the usual sense, but they can become obsolete over time. Either way, your business loses money on every product you can’t sell.
Many merchants recognize these problems and do everything they can to get surplus inventory off their hands.
How to avoid overstocking
You can avoid overstocking by investing in the right technology, understanding market trends, and getting strategic with inventory management. By following the best practices below, you’ll decrease the chances of an overstock and boost your business’s efficiency.
Invest in an inventory management system
When a business is small, it’s possible to manage inventory using manual methods like spreadsheets. However, as organizations scale, those manual methods usually don’t scale with them—and eventually, it’s time to invest in software. Inventory management software helps maintain optimal stock levels by providing real-time visibility into inventory across warehouses, automatically updating when purchases are made, and sending notifications when it’s time to reorder.
If you have a brick-and-mortar store in addition to an ecommerce store, make sure to integrate both your point of sale (POS) system and your ecommerce platform with your inventory management system. This ensures that all purchases, both online and in-person, automatically trigger stock level updates.
Understand market trends
While your inventory management system will help you order the right amount of products at the right time, you should also keep your finger on the pulse of market trends. Staying informed about changes in consumer preferences will allow you to make necessary adjustments to stock and avoid accumulating goods that are “so last week.”
These two tips will help you get started:
- Choose the right tools. Invest in demand forecasting tools to predict market trends and customer preferences more accurately.
- Ask for feedback. Collect and analyze customer feedback to understand their preferences and adjust inventory accordingly.
Audit your inventory frequently
Regular audits are like health check-ups for your inventory. By frequently assessing stock levels and sales data, you’ll identify slow-moving items and be able to take corrective action. These four KPIs (key performance indicators) are a great starting point to understanding your inventory management.
Inventory turnover rate measures how efficiently inventory is being used by calculating the number of times inventory is sold or used up in a specific time period. A high inventory turnover rate indicates you’re selling your inventory quickly, while a low inventory turnover may imply overstocking.
Formula: Cost of goods sold / average inventory value
Order cycle time shows the average time it takes to fulfill an order from the moment it’s placed to the moment the customer receives it. A lower order cycle time means you’re better prepared to handle demand.
Formula: (Order receipt date – order placement date) / number of orders
Fill rate, or order fulfillment rate, measures the percentage of customer orders you can fill through existing inventory without backordering. A high fill rate indicates that you have enough stock to meet customer demand.
Formula: (Total orders shipped / total orders placed) x 100
Inventory carrying cost measures the expenses associated with holding and storing inventory. Carrying costs include expenses such as warehousing, insurance, and labor. Your goal is to keep carrying costs as low as possible without compromising operational efficiency.
Formula: (Total carrying costs [storage, labor, insurance, etc.] / total inventory value) x 100
Establish a reliable supplier base
Some supply chain disruptions are unavoidable. But suppliers aren’t created equal, and some are better equipped to deal with unforeseen circumstances. By choosing suppliers you can consistently rely on, you’ll eliminate the temptation to over-order, keeping inventory levels exactly where they need to be and maintaining cash flow.
Use ABC analysis
ABC (always better control) analysis helps you determine your most important products, ranking them based on demand, cost, and risk data. ABC analysis is based on the Pareto principle, which states that 80% of an output is produced by 20% of the input. In this case, 80% of a company’s inventory value comes from 20% of its inventory (the Class A products).
- Class A. These products bring the most value to your business. They sell best and/or bring in the highest profits. To increase revenue, prioritize selling and restocking these products—and make sure never to run out!
- Class B. These products are medium-priority. They sell well, but customers don’t order them as often as Class A products. They usually cost more to store than Class A.
- Class C. Class C consists of your lowest-priority inventory. Although it has the lowest value, it makes up the largest portion of inventory storage costs. Many businesses don’t mind having stockouts of Class C inventory, as stockouts are preferable to overstocks.
Sorting your products into these three categories will help you determine an inventory management strategy that maximizes revenue and minimizes costs.
Set minimum and maximum stock levels
Based on the data you gather from your market trend analysis, inventory audit, and ABC analysis, set minimum and maximum stock levels for each product. When stock approaches the minimum threshold, it should trigger a reorder to prevent a stockout. Conversely, setting a maximum level prevents over-ordering. Items with higher demand will have a higher minimum level.
Tips for managing overstock
Let’s say you encounter an overstock situation—what then? Do you just wait for products to sell? Dump them all in a nearby river? (That’s a joke. Do not dump products into rivers). Fortunately, you have a few good options for getting extra inventory off your hands—without endangering local fish.
Donate products to local charities
Instead of letting excess inventory gather dust, consider giving back to the community by donating products to local charities. Not only does this contribute to a good cause, but it also provides a potential tax benefit for your business.
Sell products in bulk at a lower rate
Bulk buyers, wholesalers, and retailers are always looking for a deal. If you have excess stock, consider selling it in bulk at a discounted rate (5%, 10%, or 15% off). Selling bulk comes with an added benefit: lower shipping costs. When you ship many products at once, it’s cheaper than shipping many products separately.
Do you have products that nobody seems to want? Try bundling them with products that are flying off the shelf. Bundles add value to customers by simplifying the decision-making process, and they help you get rid of extra inventory.
Offer promotions and discounts
Another option for clearing excess stock is promotions or discounts. Whether it's a limited-time discount, buy-one-get-one-free offer, or a clearance sale, strategic promotions fuel demand. One 2022 study found that when other factors are equal, shoppers are about a product with a 20% discount over a product at normal price.
A word of caution: an overreliance on discounts can affect your brand image. For example, imagine a luxury retailer discounting a high-end watch by 80%. This could give consumers pause, causing them to wonder if something is wrong with the watch. Over time, the business could lose its reputation as a high-end store and be seen as a good place to find cheap jewelry.
Ship your inventory to customers using EasyPost
Inventory management is a delicate balance—it takes time, technology, and strategic thinking to order the right amount of stock to meet customer demand. But once you have that down, your business will operate much more smoothly … as long as your shipping solution can keep up with order volume.
The EasyPost Shipping API makes it easy to ship orders to customers. With the API, you can connect to an extensive carrier network, including major carriers (like USPS, UPS, and FedEx) as well as local and regional ones. The system automatically finds the best shipping options, generates labels, and provides real-time package tracking. The cherry on top? Starting November 1, 2023, all shipments processed through the API are , at no extra cost to customers.