While excess inventory can be a buffer against stock-outs, most businesses do everything they can do to avoid this situation. Here are a few reasons why having too many items on hand can be cumbersome and expensive and why this situation should be avoided whenever possible.
- Reduces available cash flow: Having too much money tied up in inventory can quickly create a cash-flow shortfall, and no business wants this. Moreover, such a shortfall can mean that your business will have to borrow money and pay interest on that loan. This further places a financial burden on your business. Finally, reduced cash-flow can place your business in the position of not being able to take advantage of opportunities that require an output of capital.
- Creates storage problems: Extra inventory has to be stored someplace. Excess inventory takes up extra floor space, preventing you from offering new products to your customers. After all, turn-over-per foot of shelf space is usually a pretty good measure of a product’s ability to sell.
- Reduces profits: When a company has too much of a given product, it often takes special measures to move those items, such as placing them on sale. This can significantly reduce a company’s profits.
- Creates obsolescence: Companies that dedicate a great deal of their time storing and handling excess inventory do so at the risk of neglecting to restock their warehouse with newer, more in-demand products. Thus, much of the stock that a company owns can become obsolete.
- Decreases your company’s flexibility: Having too much inventory on hand decreases your company’s ability to adapt to customer demand. A lean, optimal amount of inventory allows the company to remain flexible to changes in the market.
In short, successful inventory management is all about striking the right balance between having what your customers want when they want it and not having so much that it creates the above problems for your company.