Your inventory is a measure of supply and demand in your store. It lets you know if you are over-purchasing commodities that are not selling quickly or are not meeting market demands entirely.
Managing your inventory can be quite a task. Sometimes, technology and unpreventable shifts in the market can cause you to have products on your shelves that are simply gathering dust.
To define it, excess inventory is stock that you cannot move. It results from overstocking products or items that do not fit your clientele’s present interests.
It can be quite a headache to try and recover your tied-up capital. Nevertheless, here are a few ways to deal with excess inventory and recover some of your buying costs.
Gathering data from your consumers is the best way to prevent overstocking unsellable items. It gives you an idea of the goods they prefer over those they don’t.
This data includes the Days Inventory Outstanding (DIO) and the Sales Per Square Foot (SPSF). In an ideal environment, the value of the DIO will be lower than the SPSF.
These can be calculated manually using the following formulas:
Days Inventory Outstanding = (Average Inventory/ Cost of Goods Purchased) × 365
Sales Per Square Foot = Annual Sales ÷ Square Footage of the Store
Calculating this data can be time-consuming. However, new technology has enabled retailers to handle their inventory at the tap of a button. For example, you may use voice of the consumer testing to evaluate data that can help you achieve higher margins.
Sometimes, the reason you have excess inventory on your shelves is not a case of over-purchasing but under-marketing. Consumers might be interested in your product, but your selling point is tipping them off.
It could be as simple as strategically positioning the product in your store or making it seem like a must-have for your customers. At the end of the day, you need your consumers to buy the product without forcing a purchase down their throats.
While your profit margins might take a considerable hit with this one, it at least gives you a way of getting rid of the excess while making a little something from it. This method is best suited for the low-cost products in your store.
You could offer a buy one get one free sale which is quite similar to a buy two for the price of one deal. Other discounted deals involve taking off a percentage from the selling price, for example, selling items at 25 to 50 percent off. You could also incentivize your customers by using those products as giveaways when they purchase a specific item or number of items in your store.
If your supplier allows it, you can return the unsellable items to them for a refund or credit. You can also exchange the products for things that have a higher selling margin in your store. Most of the time, suppliers will accept the products back at a discount, and you will lose some money in shipping and handling costs. However, this is the better option as opposed to losing your capital entirely.
This could be an online sale or an event in your store. Online eCommerce stores like eBay will allow you to carry out a flash sale or an auction on your products. This gives you the chance to recover part of your capital. However, moving these products might require more time and energy and does not guarantee they will sell.
This should be a last resort for your store. Liquidation will cause you to lose out on your profit margin entirely. However, when push comes to shove, and you want to get rid of the items, they might be your best friends.
Find a company, organization, or individual specializing in liquidating goods. Liquidators buy excess stock from merchants at a negotiated price, often below the market cap. It allows you to gain some amount of your capital.
There is a fine line between having excess inventory and a safety net for a rainy day. You need to understand what your customer wants and translate that into goods for your store. Monitor your stock and eliminate the excess ahead of time to prevent profit losses.