What Is Overstocking? 7 Causes and Effects (2024) - Shopify UK (2024)

Stocking the correct amount of inventory is a challenging task for many retail store owners. If you overstock, you’re left with costly excess inventory. If you understock, you miss out on sales.

So, how do you make informed decisions when it comes to stocking your store?

Knowing how much to stock can be determined through a honed approach toinventory managementand sales data. Without this informed decision making, the effects on your productivity and profitability are costly.

Below, we share the seven main causes of overstocking and a variety of ways you can avoid it.

What is overstocking?

Overstocking, also called “surplus stock,” happens when stores purchase more product than they sell. This leaves retailers with too much stock, and that excess stock is left sitting on store shelves or in the warehouse, which hurts profitability.

What causes overstocking?

1. Misjudged customer demand
2. Fear of out-of-stock
3. Ineffective promotional marketing
4. Poor inventory management
5. Seasonality
6. Compensating for supply chain issues
7. Industry-specific challenges

Overstocking has many causes, but thankfully, nearly all of them can be mitigated through more careful calculation, planning, and analysis of your inventory.

The most common causes of overstocking inventory include:

1. Misjudged customer demand

Many retailers are facing an information deficit when it comes to their customers’ behavior, which makesdemand planningincredibly difficult.

Not being able to answer questions like“Who is our customer?” and “Are they a repeat customer?” means many retailers are flying blind when it comes to maintaining inventory levels.

As a store owner, if you can’t differentiate new versusrepeat customersand their purchases, there’s a massive hole in your data when it comes to stocking.

Misjudging your customers’ demand for your products can then lead to costly surplus stock that’s stuck on your shelves, taking up space that could be used for new products and sales opportunities.

2. Fear of out-of-stock

Out-of-stocks (OOS), orstockouts, are feared for good reason.

When stores have stockouts, or when they’relow on inventory due to shortages, the impact compounds. Not only are there lost sales, there are also long-term costs, like frustrated customers, impact on brand reputation, and the high price of rushing replacement goods.

That said, retailers need to be careful not to swing too far in the opposite direction.

In fact, overcorrection from OOS to overstocking is one of the primary causes of surplus goods. Both are costly and both are avoidable when store owners maintain a baseline of inventory best practices, which we’ll discuss shortly.

3. Ineffective promotional marketing

Marketing can be a powerful tool for engaging customers and promoting your business. But when store owners rely too heavily on marketing alone to push products, it can lead to trouble.

If you buy a large quantity of goods from your vendors, don’t assume your customers will want to buy it just because you set up a compelling marketing campaign. This is how retailers can find themselves with unfortunate excess inventory.

Customer behavior and previous sales data should drive your purchase decisions with your vendors. Guesses and assumptions should not. Otherwise you may find your store with asurplus of immovable goods on your shelves.

4. Poor inventory management

Focusing on inventory and in-stock items is fundamental to running a brick-and-mortar retail business.

Inventory costsshould also be top of mind when considering how to successfully mitigate overstocking. Unfortunately, a lack of insight into these important inventory management aspects is another cause of excess stock.

The three main types of inventory costs are purchasing costs, shortage costs, and carrying costs.

Carrying costsare the expenses related to holding or storing your inventory. This can include the labor salaries, the shipping, the opportunity cost, the warehousing or storage, and the loss due to depreciation over time—all of which impact yourbreak-even point.

If you don’t know what these costs are, then you’re acquiring new inventory without accurate data showing your profit margins andcost of goods sold. This information is key to beginning proper inventory management and avoiding overstocking.

5. Seasonality

Nearly all industries are affected by some type of seasonality, whether it’s Christmas—a great example of the impact of seasonality in retail—tax season for financial industries, or even planting versus harvest times for green industry businesses.

The question is, do you know which ones affect your store—and are you anticipating seasonal buying impacts when it comes to stocking?

Retail stores that are unprepared, not strategically pricing during seasonal buying windows, and not leveraging multiple channels to promote and sell products during these profitable times will be left with high volumes of overstock.

6. Compensating for supply chain disruptions

The supply chain is stillexperiencing significant challenges. Manufacturers, vendors, stores, and consumers alike are affected by shortages and shipping problems. Experts expect these issues to continue through 2023.

Retail stores can be tempted to provision for supply chain inconsistencies by overbuying, which leads to costly overstock. And while maintaining on-shelf availability is also a challenge, it’s important to have data tools readily available to gather insights from yourPOS.

These analytics should inform how you compensate for supply chain delays and help your in-store teams make decisions to avoid overstocking.

7. Industry-specific challenges

Depending on your industry, your retail store may face unique overstock challenges.

Fashion and apparel

Overstock clothing is an ongoing problem for stores faced withforecasting demandfor seasonal trends, and buying the incorrect distribution of clothing sizes is hard to avoid when many distributors’ default is to sell equal amounts of each size.

Your customer sales data may show that you sell 50% of clothing in medium sizes, 30% in large sizes, and 20% in all other sizes combined.

Working with your distributor to adjust size quantities and forecasting sales based on historical sales data is key to mitigating excessive stock.

Perishable goods

Retail stores that stock primarily perishable goods face a different challenge when it comes to avoiding overstock. The limited shelf life of SKUs like prepackaged food, candles, shampoos, and pet products makes getting rid of excessive quantities before they expire and become unsafe a time-sensitive problem.

Learning to do accurate demand forecasting for perishable goods is even more critical for profitability, as the opportunity for selling discounted overstock items is limited.

Consequences of overstocking

Regardless of the cause, overstocking inventory can cause some serious (and costly) problems for your retail store.

After all, when surplus stock is taking up precious time and resources in your retail store, you’re losing both productivity and profitability.

So, what are the main problems caused by overstocking inventory?

1. Storage costs

The most immediate and visible impact of stocking more than enough product isthe cost of storage and space.

By taking up shelving orback-of-store stockroom space, overstock prevents the placement of products that could sell. This is a lost opportunity cost that can be hard to recoup, as the need to expedite the sale of overstock goods often requires more time and energy, deeper discounts, and increased expenditure.

💡 PRO TIP:Ship-to-customer order fulfillmentis the easiest way to carry less stock in-store and dedicate more store space to displaying products. Rather than being limited to selling products you have in stock, you can sell products in-store and ship them to customers from your warehouse or another store location that has inventory.

2. Poor cash flow

Additionally, purchasing goods that become overstock ties up cash. And until products sell, that investment will not be recovered.

This begins to snowball as store owners lack the funds needed to replace overstock goods with new products and preventsnew product releasesthat could be profitable.

3. Product expiration

Finally, in the case of perishable and time-sensitive goods, overstocking means risking expiration and product obsolescence.

In this case, the opportunity to sell overstocked items is limited and time is of the essence. This further pressures retailers to sell their products at below-margin prices simply to free up resources.

But these are just the most immediate effects of overstocking.

The downstream impact includes additional spending on labor and personnel salaries, time spent repositioning products, the cost of transshipment or transportation of goods or delivery, and the loss of your profit margin.

How can overstocking inventory be prevented?

Avoiding overstocks and stockouts boils down to inventory management. At the root of all overstocking is blind order placing without an understanding of your store’s inventory.

With accurate demand predictions through POS data and customer behavior insights, you can minimize both the cause and effect of overstocking on your small business.

Consider following these five tips for reducing your risk of overstocking and implementing better stocking practices.

1. Invest in inventory management software

For many retail stores, inventory management software that can do a lot of the real-time inventory data, analysis, and calculations for you is a value add. There are affordable software options available to help you better understand what, when, and how much product you need to avoid overstocking.

When looking for a good inventory management system, think about the KPIs and metrics you want to begin tracking. Make sure the platform you select aligns with your goals so you have a scalable solution for your business.

2. Track sales with a POS system

Consider whatpoint-of-sale (POS) systemyou’re using and if it’s tracking the data that’s most valuable to help you make purchasing decisions.

POS data tools should enable quick, accessible information like type of sales, customer profiles, product categories, quantities remaining, and even productreorder pointalerts.

POS systems likeShopify POScome with advanced sales tracking and inventory management reports to take the guesswork out of purchasing and help you restock products easier.

3. Use ABC analysis

Leveraging the power ofABC (always better control) analysiscan help retail stores arrange inventory from most to least important. ABC analysis is based on the 80/20 rule that 20% of your products contribute to 80% of your revenue.

• A =Items that are the highest priority. These items sell the best and are the most profitable inventory for your store. They are your focus for selling and restocking and have the most influence in your inventorycycle counting.
• B =Items that are of medium priority. They sell consistently well and are ordered on a regular, less frequent cadence.
• C =Items that are lowest priority and are often stocked in high quantities to avoid frequent reordering.

This type of hierarchical categorization is a great way for store owners to optimize storage space and streamline processes so the focus is on Category A items that are going to be the most profitable for the business.

4. Assess economic and market trends

Keeping a pulse on both economic and market trends is an important part of anticipating supply chain fluctuations in order to reduce your risk of overstocking. There are ways of knowing what is going to influence your demand so you can prepare accordingly.

Google Trendsis a great tool for helping retailers gauge product interest over time and also offers other metrics that can assist in accurately stocking products.

Consider what data would help you better forecast demand and improve inventory purchasing and stocking. Then use Google Trends to search the topics and queries that can inform your decision making. For example, you can see interest by subregion and related queries for "dog toys" in Google Trends.

Using these trends and other data tools you have available, consider drafting anopen-to-buy (OTB) plan for your store. This type of plan is great for eliminating the guesswork of purchasing, using a formulaic approach to stocking.

Learn more abouthow to use Google Trends to help run your retail business.

5 Free Templates to Better Understand Your Inventory

Calculate your businesses cost of goods sold, sell-through rate, inventory turnover, safety stock, economic order quantity, or reorder point with ease using these custom templates. (No math required!)

Get your free templates

5. Audit your inventory regularly

Lastly, conduct regularly scheduledinventory audits. A successful audit involves knowing how you measure up to your key performance indicators, or KPIs. They also help you decide safety stock levels, reorder points, and dead stock benchmarks.

So, step one is establishing goals for your inventory management.

Data that may be most helpful for establishing KPIs for inventory management include:

1. Cycle time:the amount of time from product manufacturing to sale
2. Inventory turnover rate:how quickly you’re selling and replenishing products
3. Inventory count:total amount of inventory (divided into ABC groupings)
4. Order fulfillment time:amount of time it takes from product fulfillment to sale/delivery

Also think about these inventory metrics that can show you what your inventory is costing you:

1. Gross margin return on investment (GMROI):Gross Margin / Average Inventory Cost
2. Sell through rate:(Quantity Sold / Original Quantity Available) x 100
3. Inventory Carrying Cost:Sum of all costs for unsold inventory ≤ 30% of inventory’s value
4. Inventory-to-sales ratio:Available Inventory for Sale / Quantity Sold

These KPIs and metrics provide a fuller picture of your inventory, what products are workingforyou and what products aretaking away fromyour business profitability.

This is going to help you refine what you should be restocking most frequently and what products, processes and other elements of your inventory structure are contributing to an overstock issue.

FURTHER READING:Another option for combatting overstocking is to adopt ajust-in-time inventorysystem. Read our blog to learn more about this inventory strategy.

Why overstocking is really a data value issue

By now, it might seem like overstocking is a matter of what data you have available. And while that is the first step to gaining insight into how your business is run from an inventory perspective, the key is having the right data value structure in place so your store can stock successfully time after time.

It’s not just more data, more alerts, more tracking, more sales insights. It’s the right data, right alerts, right tracking, and right sales insights.

The key to successful inventory management that avoids overstocking isleveraging available toolsto help streamline your stocking and help you make informed decisions when it comes topurchasing from vendorsand manufacturing.

Want to learn how other businesses manage their inventory to avoid overstocking?

Learn how Greenery Unlimited figured out how to manage its complex, ever-changing inventory of live plants.