Overstock inventory is a $1 trillion problem—here's how to handle it
If you’re like most businesses, you’ve likely dealt with excess inventory before.
Perhaps you were looking to add a new item to your catalog, or perhaps you needed to restock a popular item—only to hit a roadblock. Most of your money and storage space is tied up in products that are collecting dust in your warehouse.
The truth is, overstocking is a common issue in eCommerce. Inventory management is never as easy as we want it to be, and even the largest brands still struggle with excess inventory.
To help you mitigate this issue, we’ve outlined the most common reasons for overstocking—and steps you can take to prevent them from happening.
What is overstock inventory?
Overstock inventory (aka “excess stock” or “surplus stock”) is inventory that hasn't sold within a realistic timeframe.
In other words, they’re perfectly good products that are ready to be purchased. However, there isn’t enough interest in them. So instead of bringing in revenue, they’re taking up valuable space in your warehouse and eating into your profits.
6 common causes of overstocking
There are many reasons why businesses wind up with excess inventory. Among them:
01. Inadequate reports and forecasting
The volatility of eCommerce makes forecasting and inventory tracking complex. While brick-and-mortar stores typically see a return rate of 8.89%, a whopping 30% of all online orders are typically returned. In addition to this, seasonality and viral trends can cause sudden fluctuations in demand.
Not to mention that if you’re a multichannel seller, you have to somehow understand shopping behaviors and preferences per channel—plus keeping inventory and orders in sync.
A lack of the right tools, centralization, data, and/or processes could all contribute to poor demand planning.
02. Overcompensating to avoid stockouts
Showing “out of stock” on your product page isn’t a good look.
Aside from deterring a sale, it could leave a bad impression on consumers—plus cause you to lose your hard-earned rankings on any marketplaces (like Amazon) that you sell on. (Marketplaces, after all, are protective of the user experience and will not look favorably on merchants that are consistently out of stock.)
To offset the potential of a stockout, you may choose to purchase tons of extra inventory. You may be especially tempted to do so when there are supply chain issues or when you’re entering a busy selling season.
The danger in this strategy, however, is that if those items don’t sell, well…you’ve got an overstocking problem.
03. Inefficient inventory management
In general, you put yourself in a risky position if you don’t have a proper system for tracking inventory movement.
While in the early days of your business, you could get away with counting stock manually, every online business eventually needs an automated system for tracking inventory in real time.
Inventory management involves a number of things—from reconciling stock levels across all of your sales channels, to calculating your margins—all of which becomes more difficult the larger your operations are.
04. Overlooking the product life cycle
Nothing lasts forever. Every item in your catalog will eventually age out of the market, but some may take a lot longer than others to reach that point. For this reason, it’s important to understand the various stages of the product life cycle and how they impact demand.
Is your product in the growth stage and likely to gain more traction? Conversely, has it hit saturation or decline, and is therefore waning in demand?
Failure to identify which stage your product is in could lead to inaccurate forecasts and overbuying of products.
05. Jumping the gun with your marketing
Though none of us plan for our marketing campaigns to fall flat, there’s always the possibility that a campaign will achieve less-than-desirable results. If that happens, you could be left with a heap of excess inventory that was purchased specifically for the promotion.
For this reason, be careful not to rely entirely on a single marketing (or advertising) campaign to get your products out the door.
While you can’t always avoid or predict issues in your marketing, make sure that you’ve done your due diligence and based your campaigns around real data, not simply assumptions.
06. Bulk ordering to snag a deal
When negotiating prices with your suppliers, it's easy to focus on accepting whatever deal gets you the best price (i.e., bulk ordering).
However, if you focus on price alone, you may wind up with surplus inventory that’s prone to spoilage or requires extra effort to sell.
The dangers of overstocking
Any company can fall prey to the dangerous costs of overstocking. In fact, inventory management mistakes have jolted some of the biggest corporate giants, including Target, Walmart, Nike, and H&M.
In the case of H&M, the retailer reportedly built up $4 billion worth of unsold clothing in June of 2018. At the root of the problem: overambitious projections. The company’s plans to keep up with store and eCommerce expansion was upended by poor inventory management and “underwhelming product offerings.”
As witnessed, overstocking can severely hinder cash flow. It can prohibit you from refreshing your shelves with newer, in-demand items. Alternatively, you’ll have to cough up more money to cover the costs of expanding storage space or getting rid of your stagnant inventory (whether through steep discounts, ads, or removal services).
8 ways to prevent overstock inventory
As harmful as overstocking can be, there are risks associated with understocking as well. The key is to find the balance of having just enough inventory to meet consumer demand, which can be achieved with the right tools, processes, and visibility.
Table of contents
01. Implement ABC analysis
The ABC inventory analysis technique is a popular way of giving priority to certain items over others. It helps you identify the top 20% of your products that are responsible for roughly 80% of your revenue.
In practice, you’ll want to categorize your items into three tiers (A, B, and C) by taking into account demand, cost, and riskiness. If you’ve got thousands of SKUs to sort through, you can assign tiers by product category instead.
Once you’ve broken down your catalog by tier, take steps to align stock levels according to importance (see “Percentage of inventory” column in the chart above). Tier-A items are your most valuable assets, and should be closely counted, tracked, and reordered. By contrast, tier-C items are low-priority items that can be stocked in greater quantities in order to consume less of your time and attention.
For all tiers, you should have a good grasp of their inventory turnover rates, lead times, seasonality, and other important factors.
02. Automate and centralize
A centralized inventory management system can simplify and optimize several key workflows: forecasting, inventory tracking, and inventory analysis.
Wix eCommerce, for example, includes built-in inventory tools to help you better manage your eCommerce business. Whether you sell on one channel or several, dropship or use a 3PL, Wix helps you retain visibility over all of your stock. Keep track of items that are ready for sale or are low in stock, and know when to reorder what.
An advanced inventory system can further help you to make smarter repurchasing decisions. It can automatically crunch your sales numbers, sales velocity, margins, lead times, and other essential factors.
03. Forge strong supplier relationships
The best supplier relationships aren’t purely transactional. They’re built on mutual trust and clear communication.
Your suppliers should understand when your busiest selling seasons are, trust that they’ll always get paid on time, and feel like a true partner. By establishing strong relationships, you’ll likely enjoy an easier time getting the best rates on your inventory. Your suppliers are also more likely to fast-track your orders as needed or check in with you when busy seasons are approaching.
In fact, some merchants trust their suppliers enough to set up a vendor-managed inventory (VMI) system. Under this setup, the supplier forecasts your inventory needs for the merchant and decides on the order size and reorder point. VMI is intended to be a win-win situation, in which you avoid overstocking and the supplier avoids over-manufacturing. But for obvious reasons, it requires lots of trust and tightly aligned goals.
04. Monitor trends
Take advantage of Google Trends, social media listening tools, and other resources at your disposal. Each of these can give you an idea of when demand for a product tends to spike or decline—and which demographics demand it the most.
You can drill deeper into related topics and specific queries that people are using to find trending products. Does the data show that demand is volatile? Or, is it continuously increasing? The answers to these questions can help you to make better purchasing decisions, informed by both internal and external data sources.
05. Conduct regular inventory audits
It’s not uncommon for merchants to schedule full inventory audits once or twice a year to correct any inventory discrepancies and evaluate your procedures. However, they can be incredibly time-consuming, disruptive to business, and costly to perform.
Alternatively, try cycle counting. Cycle counting involves auditing a small subset of inventory during normal business hours. Cycle counts can be performed anywhere between every quarter to every day. Some items (e.g., your fastest-moving stock) may warrant more frequent counting, whereas others may require less.
The goal is to maintain the most current and accurate inventory records, which, in turn, helps to reduce your reliance on safety stock.
06. Dropship products
Dropshipping is a fulfillment method that relieves you from having to hold any inventory at all. Under this model, your supplier ships items directly to your customers as their orders come in.
Dropshipping is often a viable solution for C-tier or possibly B-tier products (identified in your ABC analysis), which don’t require high levels of control. Or, you could dropship entirely.
That said, dropshipping includes its own set of risks. For example, if your supplier ships an order late or in poor condition, your customers will direct their frustrations at you, not your dropshipper. For this reason, you’ll want to ensure that you have a solid relationship with your supplier before arranging a dropshipping setup.
07. Set up pre-orders
Pre-orders offer a way to minimize the guesswork in inventory management. If you’ve run out of stock or are releasing a new item, you can accept pre-orders to gauge interest prior to placing an order with your supplier.
Pro tip: when accepting pre-orders, try coupling it with exclusive bonus content. For example, offer a free swag or entry into a raffle with any pre-order shipments. Creating an incentive has the potential to drive up sales, customer satisfaction, and advocacy.
08. Use a POS system
A reliable point of sale (POS) system is essential for any omnichannel retail strategy. Its purpose is to track every sale across every sales channel (both in store and online) to ensure your business has the right inventory at the right time.
For example, the Wix POS allows you to track stock via serial number, track stock by location, manage inventory by product variation, consolidate purchase and orders in one place—and even set up low-inventory alerts.
Bonus tip: 9 ways to liquidate surplus inventory
Despite your best efforts, you may still end up with excess inventory from time to time. Fortunately, liquidating your overstock inventory doesn't mean you have to take an immediate loss. Here are several methods to help you offload inventory and recover a portion of your initial investment.
Sell overstock inventory on other channels - There’s a chance that a product that’s slow to sell on your site will sell quickly on eBay, Amazon, or other third-party channels. Additionally, if you have physical stores in various locations, you could try moving inventory around to see if it gains traction elsewhere.
Bundle products together - Bundle your underperforming products with popular products that serve a similar audience. Buyers may be much more incentivized to try new products if it’s sold at a discount with one of their staple purchases.
Refresh, reposition, and remarket slow-movers - Could your product pages be optimized with more product details, better images, or video? Does your product need to be moved to a more visible area of your store or site?
Reprice or discount - Offer a limited-time discount, create a clearance page, or experiment with other pricing strategies to boost conversions. Perhaps bulk pricing or quantity-based discounts could pique your buyers’ interest.
Offer slow-moving inventory items as gifts - A slow-moving item could be presented as an extra gift for your most valued customers or high-value purchases. While you may not recoup the full cost of your item, this strategy can serve to boost brand loyalty and indirectly generate more sales.
Arrange for supplier buy-back - Some suppliers offer “buy-back” or refund policies for unsold inventory as a “thank you” for your business. Don’t hesitate to ask your suppliers if they offer this option.
Work with a liquidation service - Sell overstock inventory to liquidation services as a quick way to free up space. (But make sure to compare your options and check reviews. Unfortunately, not all liquidation services are worth your time.)
Create an employee sale - Discount select overstock items and hold a special employee-only warehouse sale.
Donate items - Support your local community and, as a secondary benefit, write off inventory costs by donating slow-moving items.
It’s time to get a grip on your inventory
Stomp out inventory issues early on and minimize the risk of overstock inventory. Between chatting with your suppliers and implementing the right software, there are several steps you can start taking today.
Want to learn more about Wix's built-in inventory tools? Test drive Wix's eCommerce website builder for free.
Editor, Wix eCommerce
Allison is the editor for the Wix eCommerce blog, with several years of experience reporting on eCommerce news, strategies, and founder stories.