Avoiding Inventory Pileups: Tips for Keeping Stock Levels “Just Right”

It is important to be aware of how much stock or inventory is being stored. Accurate control over inventory the stocking process leads to timely order fulfillment and therefore positive cash flow. Inventory is thus the ‘Ace’ of the supply chain game. However, being over-stocked can erode profits.

Inventory should be dynamic and cycled through the warehouse as quickly as possible. If inventory is stored for too long it will cause expensive problems as well as cash management issues.

How large a stock of goods is good to keep?

Businesses usually base inventory needs on projections/forecasts. Storing a considerable stock is an advantage as it reduces the chances of running into “out-of-stock” situations. It is estimated that out-of-stock levels are at 8.3% worldwide with faster sellers and promotional products at 10%. As a result, retailers lose around 4% of their sales. However, there are several disadvantages of holding a large stock. The major ones are:

  • Storage-related issues : Large volumes of goods require larger storage spaces which means higher storage costs due to additional costs in manpower, organization, maintenance and transportation of goods.
  • Risk of obsolescence : Some goods are perishable (for instance FMCG goods) and must be sold within specific timeframes, while non-perishables like computers and electronic devices can become outdated with technology advancements.
  • Changing customer demands : Consider the garment industry where a large stock of winter clothing would not typically be saleable during spring or fall and ends up occupying too much usable space.

What causes inventory pileup?

There are several reasons for goods getting accumulated and not being sold as expected or predicted. These vary with different industry sectors. Here is a list of the common ones:

Relying heavily on historical data : While it is a common practice to rely on historical information for projections, history may not always be a correct predictor of the future. Market situations can fluctuate wildly and goods may not sell as expected. Result—an inventory pileup.

Inappropriate or unethical practices : The production company inflate sales revenue by offering its wholesalers/distributors extra-attractive discounts. In turn, wholesalers/distributors force it on to retailers when there is no actual demand or consumption. Called “channel stuffing,” this unethical practice makes the production company business look good, but creates inventory pile up for retailers.

Sudden market changes : While all internal factors are in order, external market or political conditions can trigger unusual situations. A classic example: our beloved smart devices which are constantly upgraded with features that make perfectly functioning devices obsolete.

How to avoid inventory pileups?

Avoiding pileups starts with shifting focus from projections/forecasts towards planning strategies to improve utilization.

Incentivize actual sales and profits : Marketing can aim to make the product hero and not the promotions. Promotions and discounts have little long-term impact on sales and, at times, sales promotions actually dilute brand value. Therefore, management should focus on incentivizing actual sales and profits.

Change in production planning methodology : Planning based on historical information can be deceiving. Real-time sales information should be taken into account as well. In the case of B2B, businesses can query customers to gain further insight into future demand estimates.

Pull-off replenishment method : This means a product is produced and shipped only when the product is ‘sold.’ This seems like an ideal option, however, management experts need to weigh its feasibility against factors like competition in the market and delivery time-frames of industry peers.

Monitoring for simplicity : Constantly monitoring the supply chain operations for streamlining and simplifying operations helps. No process can be made ‘effective’ unless constantly monitored for improvement.

  • Changing trends and technologies: It is important to be updated with what is new and help in enhancing operations.
  • Automation: Usage of appropriate inventory management systems helps eliminate labor intensive procedures, reducing cost and increasing efficiency.
  • People: Feedback from staff is a great starting point for brainstorming possible process improvement measures. Engaging with suppliers, distributors and retailers to understand the demand at both sides of the production also aids in effective decision-making.
  • Being open to new ideas: Great creative ideas are often soiled by the term ‘standard procedure or process’. Monitor ways to simplify or streamline in order to reduce inventory pile-up.

Effective management of inventory enhances supply chain operations in several ways. It helps execution of orders on time and thereby improves cash flow.

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