Maintaining inventory requires careful balance. Overstocking is just as bad as understocking. Avoiding both means keeping to a very fine line between meeting customer demand without jamming your shelves full of product that will ultimately go to waste.
To understand how to do this, first you have to understand what causes overstock and understock.
Why Understock Happens
If you have more customers wanting an item than you have items available, you are understocked. It’s a situation that leads to a lot of frustration and missed opportunities. Most people who want a product now are not willing to wait. They are likely to find an alternative somewhere else.
Sometimes, understock is hard to avoid. Markets change and spike, usually in a predictable way, but sometimes you simply can’t get ahead of a random shift. In other situations, however, understock comes down to a company’s error. It normally is caused by a lack of information or a lack of planning. You should have a good understanding of typical sales and forecast using real data to meet customer demand.
Too Much Stock: How You Got Here
Wild guesses often lead to overstock. You think a product is going to move well, so you order in a lot of it, but the sales never materialize. You are left with items you will eventually have to sell at a deep discount or dispose of. Again, planning, including preparing for potential market changes, is vital to avoiding overstock.
The Dangers of Inventory Problems
There isn’t a good choice between overstock and understock. Both have a negative impact on your business.
When you have an overstock problem, you are tying up capital and space. Warehousing space costs money, on top of the cost of the product. Anytime an item is not moving, you are paying for it to take up space. As those items sit, they depreciate, which means you are actively losing potential profits as an overstock drags on. Some items may even become obsolete.
One of the biggest consequences with understock is customer dissatisfaction. Ultimately, while some customers may let one sold-out item slide, if your company is known for chronic inventory shortages, you can expect to lose a lot of customer loyalty and repeat business. Trying to rectify the problem quickly is also dangerous. Emergency restocks cost a lot of money and when you cannot plan, you miss out on potential discounts for bulk orders. All the costs of catching up eat into your profits and you may still have aggravated customers at the end of it.
Understock also makes it tricky to manage your inventory well. When you are always working to deal with stock-outs, you can never really have a good handle on the data you need to make accurate projections. It’s a cycle that is destined to continue.
Avoiding Overstock and Understock
Using accurate, up-to-date data to predict inventory levels is key to understanding supply and demand. On top of tracking historic sales and market conditions, you should also be aware of trends and shifts that can make your products obsolete or unwanted. Clear those out before they become overstock. Use inventory management tools, especially as part of your warehousing operations, and be sure to follow a first in, first out shipping protocol.