In this article we will talk about Why is excess inventory bad and what are its downsides? Before, the inventory is made, raw materials and products waiting to be sold or sent to customers, this being part of the company’s assets.
Despite being part of a company’s assets, we could assume that the more inventory it has, the larger its assets, but the situation is that it is not.
And is that excess inventory, can imply that there is more supply than demand, product of several factors, such as increased competition, economic issues or changes in the purchasing patterns of our customers.
This excess inventory is detrimental to any business, as it brings with it a increased cost of storage excess inventory increases losses from obsolete products, etc. Next, we will mention and explain some of the disadvantages that excess inventory can bring to a company.
Disadvantages of having excess inventory
Having excess of our inventory has consequences for our company, affecting the achievement of the proposed objectives. I get results in obsolete products in inventory, problems of liquidity and profitability. Next, we will see some of these.
Obsolescence of products in inventory
The world moves faster and faster, so over the years, we are more exposed to our inventory becoming obsolete. Therefore, it generates a loss when these products are devalued. It is estimated that excess inventory brings with it an additional cost of between 25% and 32% per year.
Many companies have in mind in their business plan, replenish invested in inventory with sales, but if money is invested in an inventory, which is not used, it results in not having money to cover other expenses of the company.
You may also be interested in:
If the inventory is perishable, we would be talking about the worst case scenario, because we should launch promotions, to see if we can leave the products in inventory that can be damaged.
As if it wasn’t enough at the time of canceling taxes, taxes are taken into account, which takes away even more liquid tax money.
We already have an obsolete inventory, we see our liquidity reduced, and we have also lost sales opportunities. This could mean a loss of value of our company, since investors lose confidence due to this negative situation in the company.
How can I avoid having excess inventory?
We have already seen the clear disadvantages that having an excess inventory brings us, knowing this, we must then briefly see some options that we have to avoid excess inventory.
Before continuing, it should be noted that a effective methodology, is the Just In Time, which consists of reducing the inventory, only to what is going to be used. This is the methodology used by Toyota, because it avoids excess inventory. Here are some of these ways to avoid excess inventory.
Managing what is requested from suppliers
As time goes by, we can choose to only receive products when necessary. Although there are volume discounts, these discounts are not always beneficial for the company as we have already seen, so through a good relationship with our suppliers, a good price can be achieved for the quantity that we only need.
Have real-time reports between departments
Another option that can help us prevent excess inventory is a better comunication between the different departments of our company, giving you access to the reports instantly, being useful for the inventory department to know about the situation of the company, avoiding the increase of errors.
You may also be interested in:
I'm sorry this content was not useful for you!
Let me improve this content!
Tell me, how can I improve this content?