What is Overstock and How to Prevent It

Introduction

Getting your inventory levels right can be challenging, but it’s also vital for your e-commerce business. Too little stock leads to lost sales, while too much stock ties up your capital. The ongoing global supply chain disruptions have made overstocking a common problem. The good news? There are ways you can prevent it, starting with the right inventory management tools.

With tools like Inventory Planner, you can check stock levels and order at the ideal time. Plus, you can make informed decisions by tracking customer demand and market trends. First, though, let’s answer “What is overstock?” and find out what overstock does to your business.

What is overstock?

Inventory overstock is when a business buys more of a product than it sells. This surplus stock takes up precious shelf or warehouse space you could otherwise fill with new stock. Common causes of inventory overstock include:

• Misjudging customer demand: 52% of businesses say demand forecasting difficulties have been their biggest challenge since the pandemic. If you don’t know what the demand is for a product, you can easily buy too much stock.
• Overcorrecting for stockouts: stockouts, or running out of stock, can cost you hundreds or even thousands in lost sales. But it’s easy to overcorrect for stockouts and end up with too much in stock, which is just as costly. 
• Poor inventory management: if you don’t keep track of your inventory, you can tie up capital in expensive overstock. So it’s important for online retailers to track metrics like carrying cost, cost of goods sold, and stock levels.

• Compensating for supply chain problems: supply chain disruptions have been a challenge for 86% of manufacturers since 2020. These disruptions mean many companies are buying more stock to compensate. The result is overstock.

Many businesses sell overstock in closeout sales on social media and websites like Overstock.com (OSTK). Overstock.com, Inc was founded in Midvale, Utah in 1999 by American businessman Patrick Byrne. Their Club O loyalty program lets customers earn points for purchases, reviews, and referrals. Plus, customers can purchase items with coupons, credit cards, or the Overstock.com tZERO currency.

Closeout sales mean customers can get high-quality home furnishings and other on-sale items at discount prices. Selling excess inventory also helps businesses recoup some of their costs and make space for new items. For instance, if a business has an excess number of sectional sofas and other living room furniture, they could sell it to make way for bedroom furnishings, like memory foam mattresses.

What is irregular overstock?

Irregular overstock is excess stock that contains imperfections or flaws, so it doesn’t meet quality guidelines. For instance, irregular overstock in home decor might be a mirror with a chipped frame. This makes irregular overstock harder to sell, even though the products are new.

How can overstock impact your cash flow?

Overstock can impact your business in several ways:

• Cost of storage: if you have to store overstock offsite in a storage facility, your costs will soon mount up. You’ll also have less space to store products that could sell, especially if overstock items are large, like home goods or room sets.
• Tied-up investment: if products don’t sell, then you’ll lose the money you spent purchasing them. This can become a vicious cycle if overstock prevents you from buying new products or investing in customer care.
• Expired or obsolete products: if overstock items are perishable, they could expire before you can sell them. There’s also the risk that overstock will become obsolete, especially in the fast-paced tech industry.
• Cost of disposal: you may have to dispose of any overstock you can’t sell, particularly if it’s out-of-date. This means transportation and disposal costs, as well as environmental costs if the products go to landfill. This can harm your bottom line and possibly your reputation too.

How to release cash from overstock

Optimizing your stock levels requires paying attention to both understock and overstock. Once you forecast customer demand and ensure that you have enough stock on hand to meet upcoming sales, the next step is to clear out overstocked inventory. Liquidating excess stock generates cash that you can invest elsewhere in your business, including marketing and inventory with a higher turnover rate. 

Five tips to sell overstock in bulk

There are a variety of ways to sell off overstock, but one of the quickest ways is to sell in bulk. Here are some time-tested tips to help you move out overstock as quickly as possible.

1. Experiment with bulk options to see what works for your customer base. Try different selling options. Check sales history to see how many customers are buying in a single order now. Add options at and above the average. 

People like to choose the middle option. By presenting larger options, you’re giving customers the opportunity to buy more at a better value. Customers who choose larger options are a bonus and bring up your average order value. 

2. Don’t overwhelm customers with too many options. Inundating customers leads to decision paralysis, and then they bounce from your site. Pare down options to see if it increases conversion rates. It sounds counterintuitive that buying will increase with fewer options—but this works!

3. Factor in the marginal cost of shipping larger quantities. With many (most? nearly all?) e-commerce companies providing free shipping, think about how your cost per order drops when you’re shipping one large order to a customer instead of two smaller orders on two different dates. 

The cost of one large shipment is lower than the cost of two smaller shipments. What can you do to incentivize them to purchase in bulk and increase the size of their cart? 

4. For brands that don’t want to have a race to the bottom in terms of pricing, think about how to reframe the discount of bulk pricing to add value to your brand. For example, if a customer buys 50 units, provide them with a voucher for $5 toward their next order. This method helps to encourage users to come back and become frequent shoppers.

5. Most importantly, A/B test to find what works for your customer base. Every business has to find the right fit that works for their customers. What works for one business may not work for the next. Try out different approaches—number of options, higher quantity options—to pin down what works for your customers.

Overstock identifies where your store has more inventory than is needed to meet demand. Excess stock is a factor of the forecast and the days of stock you’ve set. That is, once you’ve determined an ideal level of stock to last 30 days, then overstock is what you’ll have on hand after that time.

1. Using inventory management software

68% of manufacturers rely completely or partly on manual processes to manage their inventory and supplier relationships. This increases the risk of overstocking since manual processes are more prone to error. 

Inventory management software can help you optimize your stock levels by automating the reordering process and tracking metrics like customer demand and product quantities.

2. Studying economic and market trends

By tracking current market trends, you can predict customer demand and supply chain fluctuations. You can then prioritise products based on upcoming trends and expected fluctuations.

3. Conducting regular inventory audits

You should also conduct regular inventory audits to see how much of each product you have. Inventory management software can do this with sophisticated reporting tools. These apps use data to determine when to order stock and where inefficiencies are. 

How to determine the quantity of overstock you should clear out

Only 38% of manufacturers plan to make optimizing their inventory a permanent change. But the cause of most overstocking is mismanaging your inventory. So, businesses should optimize their inventory by:

What items are overstocked, and how much is too much?

Days of stock is the amount of time you want your stock to last. Using your forecast (sales velocity + trend) look at how long your stock will last. What is the optimal level? Thirty days is a good place to start. If you’d like your stock to turnover every 30 days, then use the forecast to show you what you’ll have on hand after your 30 days of stock (optimal stock level).

Note: Seasonal considerations

Make sure to distinguish seasonal items from products that sell well year round. Consider adding points to monitor sales velocity and discounts, if appropriate, to your holiday marketing/promotion strategy. You can also add a large promotion to your plan immediately following a holiday or peak season to connect with bargain hunters looking to help you liquidate inventory.

When looking at how many units of seasonal products to liquidate, look at when the peak season is and how far away it is. If you’re taking on overstock for the first time or the first time in a while, be careful not to liquidate too close to when you’ll need those products again. If you’re only four to six weeks away from the beginning of holiday sales, consider holding onto that overstock to promote it during its peak time.

How much overstock should you liquidate?

When deciding how much inventory to move out and how quickly to do that, there are a few things to consider:

Cash flow

How badly do you need to liquidate what you have on the shelves and convert it into money that you can use to invest in something else (inventory, marketing, salaries, rent, etc.)? Think about how much cash you could get for the overstock you have on hand. Don’t let sunk costs sway your thinking. Your previous investment in these products doesn’t mean you need to hold onto them when they’re not performing well.

Brand value – quality vs. quantity

Consider your brand when thinking about how deeply you’ll discount. Is your brand about quality? If so, deep discounts work against that. If you regularly offer discounts, then clearing out this overstock quickly with a discounted price may be less of an issue and consistent with your brand.

SKU contribution to total revenue or profit

Look at the big picture to see how much this product is contributing to your overall profitability. If a product contributes to a very small percentage of your overall revenue, why continue to carry that product? If you have a long-tail strategy for building a profitable store, then it could be worthwhile keeping this product in stock. However, this isn’t the case for most (successful) e-commerce stores.

An example

If you sell five units per month and have 60 in stock, you have 12 months’ stock on hand. If you keep 45 in stock, that’s enough to last you nine months. If you were more aggressive with clearing out overstock, then you would have two months’ stock on hand instead. 

If you’re more aggressive in liquidating products, what could you do with the (discounted) retail value of seven months’ worth of stock? Let’s say that, in the last year, SKU accounted for 0.2% of your total revenue. Is it worth keeping a few units around for a sale nine months from now? (Hint: no, it’s not!)

How urgent is your need to clear out overstock?

Note: Inventory aging

The age of your stock could be an important consideration when determining how urgently to move out overstock. Here are some instances when you should consider inventory aging:

1. Selling FBA – monitor stock age to avoid paying more in storage fees. Long-term storage fees by Amazon can add up quickly and eat into your profits rapidly.
2. Perishable products – track expiration dates and set up a markdown system when products are six months from expiration, three months from expiration and so on.
3. Industry trends – do trends change quickly in your industry? Are your products staples or items that are “in” now but will soon be on the way out? Fast fashion, electronics, and nutritional products may be subject to quickly changing trends. Keep an eye on time since launching your product line to deplete stock in a timely manner.

Inventory liquidation strategies

Now that you know how overstocked you are and the urgency of clearing out inventory (hello, cash flow!), there are several strategies to consider to make room in your warehouse and your bank account. Some will take more time, but the tradeoff can be that you recover more of your original investment in purchasing your stock.

1.   Bundle – try bundling underperforming items with hot sellers to increase your average cart size.
2.   Bulk selling – offer 5%, 10%, or even 15% off when customers buy more than one of your overstocked products. If successful, this will increase cart size and move out several overstocked items at a time.
3.   Promotional items – use overstocked items as promotional gifts when your customers purchase other products. Using products as an incentive to buy rather than offering discounts on the original product is good for brands that emphasize quality over quantity.
4.   Return to the vendor for a refund or credit. This option is admittedly a long shot, but it’s worth asking if this is an option.
5.   Swap with or sell to other retailers. Look for message boards, Facebook groups, or LinkedIn groups to connect with other merchants in your industry. Keep in mind that:

• What sells in a brick-and-mortar store doesn’t always sell online and vice versa. Look for merchants in your industry with a different distribution model.
• Different geographic regions may see different selling trends. Look for a vendor that serves a different region of your country or even a different country.
• Different website niches may see an opportunity with your product to market to a different customer base.

6.   Sell at a discount. This may be among the quickest strategies here. The amount that you discount is dictated by your brand value (quality vs. quantity) and how urgently you need to move products.
7.   Donate overstocked products – consult with your CPA to see what tax advantages may come from this approach. Beyond doing good for your community and for those in need, consider the timing of the donation, the amount of donated product, and the profitability of your store.

Cash is king. Clear out overstock before it kills your cash flow and your business. Look at what’s not working to build profitability and cut items that aren’t.

Use Inventory Planner to facilitate these overstock control methods
                 

As we discussed, the best way to avoid overstocking is to use inventory management software like Inventory Planner. Inventory Planner integrates with over 30 leading business platforms, such as Amazon, eBay, Shopify, and Etsy. Plus, it comes with a range of tools to prevent the most common causes of overstock. For instance:

• Accurately predict demand with personalized forecasting, including multiple locations and warehouses.

• Optimize inventory according to stockout history, customer demand, and seasonality. 
• Monitor stock levels so you know when to reorder to avoid understocking or overstocking.
• See where cash is tied up with overstock reporting, including what is overstock in your inventory.
• Choose from over 200 metrics to get customized reports on inventory performance.

For more information, including FAQs, feel free to explore the Inventory Planner website. You can also get an interactive demo to see the product in action.