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Pros and Cons of Holding Excess Inventory

18 Mar, 2021 | Business Tips, Inventory Management

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Having a warehouse full of products might sound like a great idea, at least on the surface. Your production must really be cranking, maybe you have a large number of customers clamoring for your product, and all that inventory is soon going to be rushing off to retailers and vendors to make you a lot of money.

Sound too good to be true? It just might be!

In best case scenarios, this could be a good business practice and would reflect why it would be smart to be holding inventory. However, it’s not always a good idea to have an overabundance of inventory, even if there are some good reasons to do so. 

So why should you ever be holding inventory in excess? Why and when shouldn’t you do so? We’re going to examine the pros and cons of holding excess inventory so you know all the facts before turning up the production and start filling up that warehouse to the rafters.

Before we do, though, let’s differentiate: sometimes excess stock is held to prepare for unexpected rises in sales or demand, and it’s this type of excess inventory we’re focusing on. Sometimes excess stock can build up as a result of bad purchasing practices or poor forecasting (both of which can be avoided with good inventory management software…but we’ll get to the importance of this type of software later in this article).

 

The Pros of Holding Excess Inventory

Is holding inventory ever a good idea?

As much as you might hear that holding excess inventory is generally not good business practice, mostly due to the costs associated with storing goods, there are actually instances when holding excess inventory is not particularly a bad thing.

Perhaps one of the biggest pluses to holding inventory is that in a strong market you have product on hand to sell quickly. Consumer behavior and demand can be fickle; with excess inventory, you’re ready to fulfill orders as soon as they come in. When you can’t fill a customer’s order quickly, that customer may look elsewhere for the product you’re selling; in the long run, your competitor gets the business because you did not have inventory on hand. In these cases, you just may have caused irreparable damage to your reputation with those customers.

Consumer demand can’t always be accurately predicted, so when you’re holding inventory, you might be sitting on a goldmine. There might be a sudden rush for your product, and you’re ready to answer the call when your competitors might not be. You can also meet the demand of individual vendors or stores. The ability to keep their shelves full and meet their customers’ needs goes a long way toward maintaining a positive relationship with particular vendors or retailers and boost your customer service capabilities.

In other words, an advantage of holding inventory is less risk of shortage. As stated, consumer demand might suddenly swing from one end of the spectrum to the other, so whereas your product was not much sought after a few weeks ago, now it’s a hot commodity. Once that product starts flying off the shelves, the fact that you were holding inventory allows you to replenish supplies very quickly, much to the satisfaction of clients, vendors, and customers.

It’s definitely a risky proposition, and if you’re ready to take on such risk then storing excess inventory is a practice you just might adopt. But for many business owners, the potential downside outweighs possible advantages to having a lot of stock on hand. While large profits just might await, you’ll need to be prepared to suffer the downsides should the market for your goods not go as predicted or hoped.

Holding excess inventory could work in your favor in that you could take advantage of suppliers’ closeout discounts; lower costs to consumers could attract new customers and give you an advantage over competitors. You’ve expanded your customer base, unloaded excess inventory, and increased brand recognition which could pay off handsomely down the road. 

 

Cons of Holding Inventory

As good as holding excess inventory might sound, there are major cons to doing so that should be considered if you’re thinking about stocking up your warehouses.

For one, it costs money to hold on to inventory. You’ll need to pay for larger storage areas to hold on to excess inventory, so that cost is eating into your bottom line. The cost of paying warehouse workers, handling materials, insurance against loss or damage, and systems for tracking and monitoring inventory all factor into the cost of holding excess inventory, so you should be prepared to handle these costs before making the decision to store excess stock.

There’s also the possibility that your product could become obsolete if you hold onto it for too long. For example, if you have technological products, your stock might become old news when new technology is introduced. You’re now stuck with a warehouse full of product that no one will want to buy.

Once you have a lot of cash tied into storage and other inventory costs, this could translate into less money on hand for such things as new product development, systems upgrades, or other business improvement practices. Holding that excess inventory could in fact hold you back from growing your business in other areas, so in the end you’re hurting more than helping your business by keeping that warehouse overstocked.

Another detriment of having excess inventory on hand is that it leaves open the possibility of bulk purchasing discounts. When the need to off-load this inventory becomes too great, you just might need to sell it at a bulk discount before you wish to do so, which equals low margins and less profits.

 

When Holding Inventory is NEVER a Good Idea

Basically, there are some industries where holding excess product is simply never good practice. For example, holding perishable items is not good business practice unless you’re absolutely certain those items can sell quickly. Thus, food manufacturers cannot typically hold excess inventory at the risk of the items going past their “sell-by” dates and no longer being able to be sold and ultimately discarded. That’s a lot of profits to throw away!

Other industries that may not normally hold excess inventory include:

  • Drug manufacturers (for much the same reason as food businesses)
  • Technological manufacturers (often the rate of advances in technology could make an excess of inventory obsolete in a relatively short period of time)
  • Clothing (styles come and go; what someone is wearing today just may be considered “out of style” tomorrow, so it’s a fine line when it comes to holding too much stock when it comes to clothes or footwear)

Of course, if sales are brisk and the market forecast is bright for any of these types of items, having enough stock on hand to meet demand is smart business practice. Again, it’s a fine line, and one that needs to be taken after careful consideration, extensive market studies (such as the use of customer surveys and study of competitor practices), and certain economic factors.

 

The Importance of Inventory Management Software

While inventory can be managed manually, it becomes a much easier and more effective task when you utilize inventory management software. While you’ll likely need to invest a bit of capital into such software, you’ll soon find that it’s money very well spent.

Inventory management software will quite simply allow you to streamline your inventory management process, and in the long run whatever you spent on this technology will come back to you many times over. By utilizing all of the aspects of this software, you’ll quickly and easily track inventory, avoid over- or under-stocking, manage production time, assess market trends and consumer/product demand, and have at your fingertips the data you need to make more informed business decisions.

At a minimum, good inventory management software can:

  • Increase profits
  • Minimize warehousing costs
  • Improve customer satisfaction
  • Keep better track of orders and maintain warehouse organization
  • Raise brand awareness and loyalty
  • Manage multiple inventory storage locations
  • Integrate bookkeeping, point-of-sale, accounting, and customer relationship systems

 

DEAR Inventory Management Software

Once you make the smart decision to implement inventory management software into your business, you’ll find that the multi-module DEAR System software contains all of the features you’ll need to best manage your inventory process.

In addition to estimating manufacturing costs, quickly writing off damaged or missing inventory, applying stock adjustments, performing stock transfers, and printing shipping labels—all in real-time—you’ll be able with DEAR Systems inventory management software to:

  • Use drop shipping to sell items without stock
  • Upload purchase orders
  • Forecast product sales
  • Automate fulfillment processes
  • Manage high volumes of multiple products
  • Monitor supplier capabilities
  • Pay sales orders and invoices
  • Schedule purchase of raw materials

Essentially, DEAR Systems inventory management software is a one-stop platform where you can handle all aspects of inventory control, quality control, sales, market analysis, supplier management, e-commerce practices, and manufacturing processes—without ever leaving your desk chair!

Reach out to DEAR Systems to learn more about our cloud ERP software and how it can help in many areas of your business operations. 

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