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Out of Stock vs. Overstock: Striking the Right Balance


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Today’s manufacturers and warehouse managers already understand the importance of proper inventory management. Ensuring accurate stock levels doesn’t just impact the company, but the customer experience and satisfaction it is able to offer as well.

However, issues that crop up again and again concern having too little inventory to fill orders, or too much for the current demand. Overstocking and running out of inventory happens more often than some inventory managers would like to admit, but many are unsure how to strike the best balance here.

Thankfully, there are a few best practices manufacturers and inventory managers can employ to prevent running out of inventory while simultaneously ensuring that they don’t purchase too much merchandise.

Motivation behind the change: The cost to business

Besides just frustrating customers, overstocking and understocking can cost businesses more than they might think. According to a recent study from analyst firm IHL Group, overstocking, understocking and unnecessary merchandise returns can really add up - to the tune of $1.75 trillion across the global retail industry. This includes more than $634 billion in out-of-stock losses and over $471 billion in overstock.

These numbers are significant, and show just how impactful a change in inventory management can be. Bringing these dollars back into the fold creates capital that can be used to make considerable improvements in the company, including investing in an inventory count solution that can keep the business on track, and ensure losses like this don’t continually occur.

Creating balance in the warehouse: Best practices for inventory management

There are a few main contributing factors that can cause both overstocking and understocking. Pinpointing and preventing these are the first steps on the road to more efficient inventory management. A leading indicator to consider here is the customer demand and sales forecast. These predictions are incredibly important for maintaining proper inventory levels, but any inaccuracies here can really impact merchandise management.

Another problem occurs when companies use multiple spreadsheets or platforms to keep track of inventory levels, Brandon Levey of Business.com noted. Often, these will increase with the number of channels a company is involved in - a business may have one spreadsheet for merchandise sold online and another for brick-and-mortar inventory. However, this can create informational silos that prevent accurate ordering and management - not to mention confusion among staff members that have to use disparate systems.

Once these common problems have been identified, there are a few key methods companies use to combat inefficiencies, and other inventory management issues. Let’s take a look at the top best practices for preventing overstock and out-of-stocks:

  • Pay attention to the market: Monitoring the market helps businesses prepare for periods of peak demand, and help managers understand when demand might reach a plateau, or fall off. This information should be heavily weighed for inventory management, and should be included in upcoming sales forecasts to ensure accuracy.
  • Take a look at historical customer purchases: Inventory managers need to focus their scope on the business’s own sales levels. Examining historical transaction information helps highlight high and low demand periods, and so the company can stock its merchandise to match. For instance, a company selling swimsuits will see in its historical transaction information that demand slows during colder months, and it will then order less inventory to prevent overstocking.
  • Consider the company’s marketing efforts: Understocking may occur when a business launches a marketing campaign, but does not have the inventory to back up the increased demand levels that follow. When managing inventory, stakeholders must consider the marketing campaigns the business is involved in. Which products are currently receiving the spotlight in an advertisement? Which haven’t been featured in a campaign in a while? Which products are on sale right now? Answering questions like these really assist managers, and help ensure that the company always has enough merchandise to fill orders resulting from marketing efforts.
  • Prevent oversight in the warehouse: Even a small step like organizing the location of merchandise in the warehouse makes a big difference. The most in-demand products should be placed closest to the shipping area, with the slowest moving inventory kept in the back. This helps ensure that staff members always know where to look, and that there are no oversights.

Finally, there’s no overlooking the traditional physical inventory and cycle counts. This essential part of the inventory management process is best completed with the help of a solution like Mobile Warehouse Inventory Management Software. This innovative platform enables inventory managers to streamline the process for the overall count, as well as for the creation of count sheets and entering the count into the NAV module.

To learn more, download the white paper Keeping the Physical World and the Virtual World in Sync.

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