Blog Inventory Overstock Analysis Insights: How To Measure Overstocking’s Impact and Prevent It With Accurate Forecasting
27 February, 2024

Overstock Analysis Insights: How To Measure Overstocking’s Impact and Prevent It With Accurate Forecasting

The end of the year is often a time for celebration, gift-giving, and spending time with loved ones. For retailers, the Q4 sales hike can be both exciting and challenging. 

In 2023, the National Retail Federation predicted that holiday sales in the U.S. alone would range from $957.3 billion to $966.6 billion. Ultimately, sellers want to have enough stock to meet customer demand and avoid missing out on this valuable sales opportunity. 

But what happens if you buy too much? As the new year rolls around and shoppers go back to their day-to-day lives, you can be left with a significant surplus inventory in your warehouse that may sell slowly or not at all. 

Overstocking is a common issue for product sellers, especially in Q1, when the previous year’s holiday buying season comes to a close. 

That’s why we partnered with Inventoro to offer an Overstock analysis to help Cin7 customers understand the impact of surplus stock on their businesses and identify the best ways to reduce excess stock and prevent future inventory issues.

What is overstocking?

Overstocking is when you purchase more inventory than you’ll sell. Typically, it’s caused by either a lack of demand forecasting or inaccurate sales volume predictions. Since the holiday shopping season often sees sales spikes and less predictable demand, determining the right stock quantity for purchase orders leading up to Q4 can be difficult.

While overstocking might not sound as serious as running out of items, it can place a significant burden on your business. Specifically, surplus stock ties up working capital in unsold products, increases storage expenses, and hurts profitability. 

Cin7’s inventory management software can help you avoid inventory inefficiencies like overstocking and move toward Connected Inventory Performance (CIP). Understanding, monitoring, and reducing overstocking are critical components of CIP. One way Cin7 enables product sellers to achieve CIP is by offering integrations with analytics and forecasting platforms like Inventoro.

Inventoro is an inventory forecasting platform that uses AI-powered sales forecasting to help place better purchase orders, reduce stockouts, and minimize inventory. All Cin7 users have the option to add the Inventoro integration for an additional fee to create automated inventory performance, sales forecasting, and replenishment reports from the historical data they collect in Cin7. 

As part of this partnership, we offered a one-time Overstock report in Q1 of 2024. We analyzed the data of dozens of small and medium businesses (SMBs) who opted into the report and found that overstock often represented over half of a seller’s inventory after the Q4 sales period.

The state of overstocking for SMB product sellers

In 2024, 31 companies opted into the Q1 Overstock report, which provided a snapshot of their surplus inventory at a given moment. It should be noted that the product sellers who opted into the report are heavily impacted by the end-of-year holiday sales hike and more likely to be dealing with overstocking as a significant issue. Here’s what we learned.

Sellers had an average overstock value of $560,000

For sellers that opted into the analysis, overstock values ranged from a few thousand dollars to six figures. On average, sellers had around $560,000 worth of products in overstock

That’s over $500,000 that could be invested in attracting more customers, developing new products, or expanding into additional sales channels. Instead, those products are sitting in a warehouse and increasing storage expenses each day they don’t sell.

Three-quarters of inventory qualified as overstock

In Q1, sellers that used the Overstock report had an average surplus stock level equal to 75% of their total inventory. While overstocking is common in Q1, given the challenges of forecasting Black Friday and holiday sales, the data shows that, on average, product sellers were buying four times the stock they needed. 

The lowest percentage here was 49%, which means the companies with the least amount of overstock were still buying almost twice the number of products they needed.

Deadstock made up almost half of overstocked products

Deadstock refers to items that are least likely to sell out even if you discount. For the sellers who opted into the Overstock report, deadstock represented around 48% of overstock on average. This means that almost half of the surplus stock for these companies represents a financial loss.

For example, it may take more than two years for a certain product to return to optimal inventory levels, which means these items take up valuable storage space in your warehouse, collecting dust

Sellers experience stockouts roughly 5% of the time

The Overstock analysis also measured how often the sellers lost a sale due to stockouts. Sellers who participated experienced understock issues around 5% of the time and lost an average of $30,000 per month due to lost sales.

Overstocking didn’t prevent stockouts

What’s crucial to note here is that increasing their surplus stock didn’t lead to fewer stockouts. Instead, most sellers who opted into the Overstock report were dealing with both issues — having too much stock and running out of products that customers wanted. 

This can happen because optimal stock levels vary by SKU and location or sales channel. For instance, you may have too much of a product at one branch and not enough at another. In that case, you have overstock and a stockout for that same product.

How to reduce surplus inventory and prevent overstocking with Cin7 and Inventoro

While visibility is key to understanding the impact of overstock on your business, it’s only the first step in correcting it. Here’s how you can use the data from Cin7’s inventory management platform and insights from Inventoro to reduce existing overstock and prevent the issue from recurring.

Leverage sales data to strategically offload surplus stock

Holding on to excess inventory increases storage expenses and ties up capital, making it difficult to run an agile business. So, it’s important to sell surplus stock to free up warehouse space and increase cash flow.

That said, you want to tailor your sales strategy to each SKU based on customer demand and inventory turnover. For instance, popular items with a high sales volume can return to optimal levels in a few months without the need for discounting. If you simply discount everything, you’ll cut into your profit margin for products that would have sold at full price.

Inventoro makes it easy for Cin7 users to strategize inventory reduction by dividing each SKU into one of three categories and providing actionable steps for each type of product:

Product category Description Recommended action
Winners Popular items that will likely return to optimal levels without discounts Wait; don’t discount items
Chasers Less popular items that will partially sell out Consider discounting to return items to optimal inventory levels
Deadstock Items with little to no customer demand that won’t sell out Negotiate a buyback with your supplier

By using past sales information to separate popular items from obsolete inventory, you can take advantage of data-driven decision-making to maximize profit while reducing your inventory to its optimal level.

Keep in mind that getting rid of overstock can take time. Even items in the winners category can take up to six months to return to optimal levels. As you work on reducing your current inventory, you can also focus on improving your procurement to avoid adding more overstock inventory.

Use accurate forecasts to improve purchase orders

The key to preventing overstocking lies in placing better purchase orders. You want to order enough products to meet customer demand without going overboard. To do this, you need highly accurate sales forecasts to tell you what demand will be. 

Using Cin7’s inventory data and Inventoro’s AI-powered forecasts can help you avoid over-ordering by considering past sales trends and seasonality. Cin7 also shows you real-time inventory levels of each line item on a purchase order so you can check how much stock you have on hand before confirming a new order.

Besides preventing overstocking, accurate forecasts can help reduce sales losses from stockouts. Inventoro’s forecasts use multiple metrics, including sales volatility and supplier lead times, to calculate the right amount of safety stock to have on hand to meet customer demand without leading to overstock.

Consider reorder points as fluid

As your business grows, it becomes impossible to use a static or one-size-fits-all strategy for optimizing reorder points. When you’re tracking multiple SKUs across various locations or e-commerce channels, it’s important to understand that reorder points are fluid. 

For example, the minimum stock levels of your warehouses should be higher than that of individual branches. This allows you to resupply branches and avoid stockouts without overstocking individual stores.

Reorder points also change depending on the time of year. The number of items you need on hand in Q2 might be less than what you need to meet demand for Black Friday and holiday sales. 

With the help of real-time inventory data from Cin7 and sales forecasts from Inventoro, you can move toward CIP, which allows you to tailor your purchasing across multiple locations and channels.

Rein in your overstocking problem with optimized inventory management

Excess inventory takes up valuable storage space, restricts cash flow, and does little to prevent stockouts. Overstocking can easily become a hindrance to your business, making it difficult to control costs and stay profitable.

Leveraging Connected Inventory Performance with Cin7 and using Inventoro’s accurate sales forecasts enable you to optimize your inventory and avoid overstocking in the future.

As a result, you can free up valuable working capital and reinvest it into marketing your products or expanding your brand into new channels or geographical areas. If you’re ready to right-size your inventory, try Cin7 today.

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