Why does excess inventory occur?
In today’s technology savvy world, one would often wonder, does excess inventory actually occur at a manufacturer’s end? Ideally it shouldn’t since there is an entire range of inventory management tools and techniques like lean manufacturing, six sigma and just in time processes. However, organizations still incur excess inventory due to various avoidable and unavoidable reasons. While validating our idea on Tradexs, we met a number of manufacturers to gauge whether they face the problem of excess inventory and we were astonished by the numbers. Our educated guesstimate says that organizations incur 3-5% of their total revenue, as excess inventory. This revealing estimate motivated us to look into why excess inventory occurs at all, and we discovered following reasons.
  1. Returns from customers
  2. In today’s customer centric world, where services are a norm of differentiation, returns from customers have become a regular feature. If one doesn’t like what they have purchased, if it doesn’t suit their requirement, it can be returned. However, this marketing gimmick has resulted in huge pile up of inventory, which was sold to the customers in the first place. Further, this inventory when received, is quite often damaged in transit.
  3. Wrong forecasting
  4. Aggressiveness on over achieving sales targets and corporate goals faster is another reason for incurring excess inventory. It leads to Sales team over forecasting and eventually end-up underachieving them.
  5. Bulk purchase to get a better price
  6. This can be attributed to overambitious cost reduction targets taken to plan high profitability. Each organization, to save a little, lands-up ordering more than required quantity, resulting in excess purchase. This becomes a concern especially with perishable raw material like lubricants and rubber material. Bulk purchases also occur in anticipation that organization will be successfully using the excess quantity in due course. However everything doesn’t always go as planned.
  7. Poor stock management
  8. A visit to a manufacturing company’s warehouse and one can see how poorly the inventory is stacked or stored. Many a time’s good inventory gets damaged due to poor storage facilities or habits. In few instances, a particular item may be visible on system inventory list but it gets challenging to locate it physically. As a result, the purchase team orders the same inventory item again for their current immediate requirement while the one in stock gets carried forward without being traced.
  9. Changes in market conditions
  10. The earlier few points were internal challenges. However there are various other external reasons too for incurring excess inventory. Order delays / cancellations from customers, changes is economy etc. result in unpleasant surprises. In todays connected world, if there is an issue in New York or Tokyo, it affects business at Mumbai, and gauging this sort of global market behavior is a major challenge for companies.
  11. Changes in design and specifications
  12. Change is the only constant and so does the product design, size, colors etc. keep changing rapidly too. Due to this a lot of raw material which is exclusively ordered for the older design, becomes obsolete. Example: changes in design of sports material results into excess inventory of obsolete design moulds for manufacturers.
  13. Items as excess inventory due to relocation
  14. Relocation of entire plants or offices results in discarding many usable items since the cost of relocation renders it unviable. This results in many inventory items that are fully functional and of good quality but left unused. This is a common phenomenon. To summarize, it seems unavoidable that a certain amount of excess inventory will be generated despite methods and tools applied in today’s times. Apart from blocking the capital and the space which are scarce resources, it also leads to high maintenance cost if the items are to be in sellable condition. Therefore, liquidating excess inventory well in time methodically, transparently and profitably seems the only way out.