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The Real Cost of Carrying Too Much – or Not Enough – Inventory

The hidden costs of carrying too much - or not enough - inventory

Another problem many merchants encounter on a daily basis is poor visibility. They don’t have a dependable real-time view of their – or their suppliers’ – inventory, therefore they can’t manage it effectively. Having this visibility is critical to preventing stockouts and overstocks, and to increasing selection.

The Headache of Stockouts & Overstocks

You’ve probably already found out the hard way how stockouts result in lost sales. You don’t know exactly when you or your suppliers will run out of a certain product. There are so many to monitor! So you keep selling – overselling – and then you find out you’re out of stock and can’t deliver. What’s worse, you probably received negative feedback and your account might have been suspended.

Check this out: statistics published in 2015 by IHL Group – a research firm for the retail industry – show empty shelves and other inventory problems led to a 4.1% revenue loss for the average retailer, and $634.1 billion was lost to stockouts. Even though these numbers are referring to brick and mortar retailers, it’s reasonable to assume it’s the same story online – if not worse.

If you buy inventory before it has sold, the pendulum can also swing the other way and you end up with
too much stock. The same study found that forecast failures and suppler issues led to a loss of 3.2% for the
average retailer, with $471.9 billion lost to overstocks.
The high cost of stockouts & overstocks.png

You don’t know right away when a product’s not selling well. When you do find out, everything slows down. Your working capital is trapped when you can’t turn over inventory quickly. To get rid of that overstock you offer steep markdowns, which in turn, eats into your margins. You’re not only losing money – you need more money to regain the ground you lost!

The Real Cost of Dead Inventory

Here are some more eye-opening stats: when factoring in additional expenses like financing, insurance, taxes, and warehouse overhead, the total cost of dead inventory can be 25-30% more than its original per unit cost. When your cash is tied up for too long, you also miss opportunities for potential sales and profit on newer products. Ouch!

Of course, when you’re busy dealing with fallout from stockouts or overstocks, you have no time – or money – to seek out new opportunities to increase your SKU count. Not knowing how much inventory you have or have access to, and not knowing where it is at all times results in poor and delayed decision making.

Having real time inventory visibility means you order less inventory, more frequently and more reliably. It also means you use less capital to generate the same gross profit. You free up capital that you can either
reinvest or save, and you avoid high interest debt.

The Wrong Way to Prevent Stockouts & Overstocks

You need to effectively track and measure those key metrics: what’s selling, what’s not selling, and what’s new to add to the roster. Not only that – you need to know about it at the time it is happening to react effectively. How are you going to do this?

Some online sellers try to address these challenges by buying more software applications and tools.
Unfortunately, this not only fails to solve the problem, it compounds it. They pay an arm and a leg for tools
designed to operate on their own. The systems aren’t connected and require even more time to ensure they work properly.

Maybe you’ve invested in ecommerce software labeled as ‘integrated’. But after all was said and done, you
had to manually enter data into the system multiple places, multiple times. You’d need an extra pair of hands to be able to do this efficiently!

The Benefits of Getting Inventory Management Right

You can’t solve problems you can’t see, and you can’t take advantage of opportunities you can’t see. You need to quickly and easily see problems – like dead inventory and slow sellers – and opportunities – like high demand and fast moving inventory – to be able to act accordingly.

Inventory inefficiencies are everywhere. The total cost of stockouts (-4.1%) and overstocks (-3.2%) equate to
losses that would be the same as increasing top-line revenue by 7.3%. The right technology and better
forecasting can help recapture 50-70% of these losses. Best of all, this revenue increase doesn’t come at the expense of acquiring more customers or opening a new sales channel.

It comes down to doing things you’re already doing – but smarter.


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