Inventory management is a central, often expensive challenge for many CPG companies. Managing inventory levels proactively can be the difference between a company achieving its revenue and growth goals or falling short and closing down. Disturbance in a company's supply chain, no matter how slight, can have a measurable impact on the company’s ability to get its products to consumers on a timely basis.
When a company holds too much stock of raw materials, components, or products that haven’t yet been sold or consumed, that is considered excess inventory (also referred to as overstock). Excess inventory is notorious for delaying the use of otherwise available working capital.
There are various reasons that excess inventory at CPG companies may occur, but generally it happens when supply outpaces demand, and inventory turnover becomes slower than expected. This can occur when a CPG company fails to accurately predict demand. Maybe they failed to take into past sales trends such as seasonality, or maybe a marketing campaign wasn’t as beneficial to demand as predicted. Maybe they had inaccurate data on shelf life, lead times, velocity, or any of the various aspects of brand distribution.
Demand forecasting can also fall short due to external factors, such as new negative sentiment about the company and/or their products, sudden changes in the market, or unexpected geopolitical events impacting supply chains. A CPG company's ability to regulate and manage the external risk in accurately predicting the demand for products can have a large effect on maintaining an efficient inventory level.
Needless to say, automating processes to accurately predict changes demand in demand from both internal and external factors is even more important in our fast changing world and vital to a company’s success or failure.
If a CPG company does overpredict demand, the resulting excess inventory will tie down working capital, which may lower COGS. The company will also have to manage the overstock, which can result in extra storage expenses for the excess inventory. It can also lead to the product being undervalued when liquidated, which can result in lower margins.
Conversely, it’s also possible to inaccurately predict demand by underestimating. In this event, safety stock or spontaneous high-price vendor contracts may have to be deployed in order to satisfy the underpredicted orders.
Let’s dig a bit deeper into the implications of holding excess inventory.
Importantly, excess inventory is not always a negative occurrence. Overstock can be an important safeguard against unexpected demand spikes–it can be utilized to satisfy orders when demand goes above and beyond predicted levels. Excess inventory could also be part of an overarching tax or accounting system that aids the company’s finances over time.
While there can be some benefits to excess inventory, as we’ve already alluded to there are a multitude of risks and consequences to be taken into account.
Firstly, excess inventory can lead to products being marked down at extreme discounts. This can damage a brand in more ways than explicit dollars and centers–it can also hurt a brand’s reputation, as lower prices can be perceived as lower quality. In this case, why would CPG companies enact these discounts? This is because there can be immense costs to holding the inventory, such as warehousing costs, or conversely high disposal costs in the case of products that have end-of-life or obsolescence concerns.
Beyond the mark-down costs themselves, there are costs to excess inventory in the form of deploying additional resources, such as sales reps, as well as additional transshipment costs, if the product needs to reach discount retailers in unstandard locations.
Overall, excess inventory can be a large risk for your CPG companies unless it is accounted for in the company’s long-term operations strategy. Companies can avoid overstock by investing in strong inventory management personnel and technology to consolidate inventory and purchase data, and streamline the accurate forecasting of demand.
Bucephalus is a supply chain ops platform that empowers the millions of fast-growing e-commerce brands to move products faster, cheaper, and more sustainably using AI. We supercharge our customers’ operations by giving them a birds-eye view of their supply chain, acting as the connective tissue between the backend of their operations and single-use apps. Our product is continuously processing customer data using our AI systems inspired by our team’s experience working in data science at Amazon.
Learn the pros and cons of carrying excess inventory on hand for e-commerce retailers
Demand forecasting is a powerful and lucrative tool e-commerce businesses can employ to future-proof their inventory management. Below we discuss why demand forecasting is necessary and how to get started.