Overstocking and understocking are two problems that product-based businesses face. These problems can be especially challenging for new businesses who are just getting started and have not had time to gather much data, get to know their customer base, or go through many seasonal cycles yet. We’ve compiled a quick guide including valuable information about common inventory management pitfalls of overstocking and understocking and how to avoid them.
What is inventory overstocking?
In simplest terms, inventory overstocking is when a retail business purchases too much inventory.
Overstocking is a common issue for many small businesses, especially in the beginning stages of growth. A lack of proper planning and proper analytics can lead to overstocking.
It can be tempting to purchase large amounts of inventory in hopes of making more profit. Likewise, it is easy to accidentally purchase more inventory than you actually have a demand for, especially when you are still learning what your customers want and need. However, overstocking can hurt your company’s cash flow and profit margins and should be avoided.
What is inventory understocking?
On the other hand, inventory understocking is when a retail business fails to purchase enough inventory to keep up with demand. It is especially common in businesses with high seasonal fluctuations and new businesses who are still learning the demands of their customer base.
Understocking may be a company-wide issue, or it may apply only to a few best-selling products that just seem to keep flying off the shelves. While not a bad problem to have, you may be missing out on potential profits and hurting your company’s reputation if the products your customers want are routinely out of stock.
Key differences between overstocking and understocking
While both overstocking and understocking result from a failure to plan, there are some key differences in how they affect your company’s bottom line.
Overstocking can put a stress on your warehousing capabilities, leave you stuck with oversupply that must be sold off, and takes away funding from other areas of your business such as marketing or staffing.
On the other hand, understocking leaves money on the table in the form of missed sales, eating into your company’s revenue and profits. Even if you choose to fulfill those transactions as backorders, it can put a strain on your business.
The good news is that both of these common inventory issues can be addressed with proper planning, data, and inventory management.
Causes of overstocking and understocks
Here are the most common causes of inventory issues such as overstocking and understocking:
- Reliance on emotions over data: Although starting a new product-based business can be exciting, you must make your business decisions based on facts and not emotions. If the product you thought would be a best-seller turns out to be a dud, cut your losses and move on. Businesses make mistakes when they fail to account for the numbers.
- Failure to collect data: Of course, you can’t make business decisions based on data if you aren’t gathering any. Inventory analytics is key to understanding why your business performs the way it does. Likewise, it is equally important to identify your target audience and know what their product demands and expectations are. Lastly, all retail companies should stay up to date with current market conditions and industry trends.
- Failure to innovate: Not keeping up with technology can lead to gaps in inventory visibility and decrease the efficiency of your inventory management systems. For example, if you are still maintaining paper records, you are likely missing out on an opportunity to streamline your operations and save both time and money on your inventory management. The right technology can be especially helpful for eCommerce companies who often have to monitor inventory remotely across multiple locations.
- Failure to forecast: Likewise, demand forecasting software can help you make the right inventory calculations. This is especially helpful if your company is just starting out and doesn’t have much historical sales data to go by yet. While even the best forecasting is still a prediction of future demand, it is still far better than a random shot in the dark.
- Failure to account for seasonality: Seasonality can lead to some of the biggest gaps in inventory management if you don’t anticipate these drops or increases in demand. For example, if you own a sports & outdoor business, you probably won’t need to order as much camping gear in the winter or snowboarding gear in the spring. Keeping these seasonal fluctuations in mind can help your company avoid common inventory pitfalls.
Tips to minimizing inventory overstocks and understocks
With the proper inventory management system, businesses can avoid costly mistakes when it comes to ordering and maintaining the proper amount of product in stock.
- Ensuring you have the right systems in place: Whether you handle your company’s inventory in-house or through third-party fulfillment or logistics companies, it is important to maintain a cost effective inventory management system that accounts for shipping speed, customer service, staffing, efficiency, accuracy, and quality. If your current system isn’t quite cutting it – don’t be afraid to jump ship and find one that will.
- Performing inventory audits on a regular basis: Even the best performing business can always improve, and inventory audits can help ensure your company is operating at its highest potential. Undergoing regular inventory audits helps to ensure accurate data, identify areas of shrinkage, and give you a better understanding of inventory flow.
- Accurate data collection: Without data, your business is flying blind. We’ve compiled an article on the top inventory management KPIs your business should be tracking here.
- Inventory management software: Inventory management software helps increase your company’s visibility into your available inventory, especially if you are using third-party warehousing and order fulfillment services. With the right software, you can track your available inventory from anywhere in the world with just the click of a button.
- Use the ABC method: ABC analysis classifies and prioritizes your inventory into 3 key categories: (A) high-value products with low sales volume, (B) moderate-value products with moderate sales volume, and (C) low-value products with a high sales volume. Taking the time to use this system will both boost efficiency and save you money. For example, using ABC analysis can help companies understand which products need to be ordered the most often, and which big-ticket items you should avoid overstocking.
How Kickfurther can help
Inventory challenges are real, and they go beyond just overstocking and understocking. Oftentimes, inventory levels are a direct result of funding. Small businesses may struggle to get the funding they need at a price they can afford. Determined to succeed, they know they must find a way. For entrepreneur Sean De Clerq, the way to succeed was to create Kickfurther.. Kickfurther is the world’s first online inventory financing platform that enables companies to access funds they were unable to acquire through traditional sources.
So how does it work?
Kickfurther has companies start by creating a profile. Next, we connect brands to a community of eager buyers who help fund the inventory on consignment and give brands the flexibility to pay that back as they receive cash from their sales. Flexible repayment schedules alleviate cash flow challenges that are often made worse by traditional lenders. Small businesses can take advantage of flexible repayment schedules by allowing the brand to scale quickly without impeding your ability to maintain inventory. To qualify for funding through Kickfurther, brands must sell physical products or non-perishable consumables. In addition, brands must have revenue between $400k to $15mm over the last 12 months. Our average funding amount is $78,000, but businesses can fund up to $5MM to manufacture new inventory or get reimbursed for current stock.
No matter how your company chooses to maintain its inventory, business owners must keep in mind the various aspects of inventory management including how to avoid overstocks and understocks, how to account for seasonality, how to gather data about your inventory, and how often to order more inventory. Furthermore, they must ensure they have the funding to stock the appropriate amount of inventory without taking away from other parts of the business. By freeing up cash flow, hopefully you have more money to invest in other critical areas of operation.