Excess stock is part of running pretty much any business that carries inventory. Demands can change quickly, bulk pricing is tempting, supplier minimums can be tricky and there’s more than enough room for human error when forecasting stock manually. In some cases, identifying excess stock is easy (remember those dusty boxes in your warehouse?) but other times it can be more complex. Understanding how the inventory ended up in excess is key to mitigating future occurrences. But since excess stock is almost unavoidable when carrying inventory, quickly identifying the stock and disposing of it efficiently will save you money and ultimately improve your bottom line. In addition, implementing the right inventory management tools can help you establish lean, yet flexible inventory levels.
First consider non-stocked items. Any item that isn’t stocked is in excess when it sits in your inventory (minus backorders). These items are typically easy to identify since they shouldn’t be in your inventory at all.
Excess inventory gets a little trickier when looking at stocked items. With these items, you don’t want your stock exceeding the maximum stock level. Your maximum stock level is the safety stock plus the replenishment cycle stock. Based on the assumptions that a) your forecasts are precise, b) the lead time for this item is accurate and c) the replenishment cycle and safety stock are correct, any stock in your inventory that exceeds the maximum stock level is excess stock. This excess stock can be disposed of without threatening your customer fill rate or satisfaction level.
Before making a decision to dispose of excess inventory, evaluate the excess in days of supply. If the days of supply falls within an acceptable range of excess, e.g. 30 days, allow sales to bring inventory in line with maximum stock level. It is almost impossible to maintain perfect inventory levels. Give your teams guidelines for deciding when extraordinary measures are taken. Establishing an acceptable range of excess inventory, expressed in days of supply, provides leniency before efforts are expended on disposing of inventory.
One important consideration is the impact of lead time in the replenishment cycle. For example, assume an item in my inventory is over my maximum stock level by 1,000 units and that I have no purchase orders in my pipeline. If I get rid of those 1,000 units and my customer places an order, that order would arrive one lead time later. Therefore, a known short lead time would not threaten my customer fill rate or service level, but a long lead time might.
Excess stock is inevitable. Improving the processes around excess stock involve both people and tools. Create a dedicated team to monitor, manage, and dispose of excess inventory. A formal team will give the time and attention needed to prevent excessive stock and provide constant steps toward improvement. You’ll also want to consistently review purchasing lead times, minimums and multiples your top suppliers. Accurate lead times, low minimums and multiples are imperative to managing excess stock and maintaining your customer satisfaction levels.
Improving the processes around excess stock involve both people and tools.
When integrating an Inventory Management System, ensure the solution considers the lead time when calculating the disposable excess quantity for all your stocked items. The solution you select should have effective classification forecasting and safety stock and ordering tools so you properly stock items to begin with. In addition make sure it can identify over-forecasted items and any inventory that is in excess.
With a little know-how, a dedicated team and the right inventory management tools, you’ll be on your way to controlling your excess stock and establishing a lean inventory.