As we define inventory excess, there can be several situations where the term could be accurate because there are many different reasons why businesses may end up with excess inventory.
It could be a forecasting issue or the market recently changed, or maybe you ordered the Minimum Order Quantity (MOQ) just to get in the market. Perhaps extreme conditions like a lockdown or severe weather are causing spoilage.
In any case, ending up with excess inventory is an unfortunate but a usual part of running a product-related business and as a company, you have to make sure you plan ahead to avoid serious losses.
Ending Up with Inventory Excess
Obviously, it all depends on how you’re going about ordering products and you have to think of the inventory that you currently have. Aaron Alpeter advises, “You have to understand that excess inventory doesn’t just have storage cost, but it’s also a cash constraint and therefore, a concern.”
Here’s a couple of questions that all businesses should navigate through in order to figure out how to deal with excess inventory:
The first question, according to Aaron, becomes:
Do I have enough liquidity to sit on this inventory?
Let’s suppose you have a target inventory of 90 days and you’re sitting on a year’s worth of inventory. The question you should ask yourself is, do you have the cash reserves and are you willing to sit on 4 times the amount of inventory that you need?
This will lead you to business and product-specific questions such as:
Will my product expire?
Can it be resold, relaunched or recycled?
Am I anticipating labeling or packaging changes in the near future?
Once you answer these questions, you can decide whether you’re going to sit on inventory or try to order less.
Dealing with Excess Inventory
Different businesses have a variety of ways to deal with inventory problems and depending upon the size of your business and the amount of inventory, you can probably end up doing any of the following:
- Returning the product
- Reselling the product
- Recycling the product
- Wasting the product
If we look at the CPG market, there are two major players that need to manage excess inventory, the brands and the retailers.
Although brands have their fair share of inventory excess issues and ways of solving them, let’s take a look at how retailers handle it:
How Do Retailers Deal with Excess Inventory?
When it comes to inventory management for retailers, everything is taken up a notch. Since you’re dealing with substantially high volumes, you have bigger numbers and more complicated analytics to work with.
Although retailers are good at coming up with demand forecasts, it’s not uncommon for retailers like Walmart and Target to experience issues when managing inventory.
It’s always interesting to ponder what retailers do with their excess inventory considering the large volumes and different scenarios they face with each product. To answer the question, Aaron Alpeter shines some light on the matter by telling us of the ways retailers deal with inventory excess:
Return the Excess or Ask for Credit
The first thing retailers can do when they encounter an excess is to ask the brand to return the product.
Retailers have significant negotiating power, making their contracts much more favorable for themselves. Since they offer substantial business opportunities for any brand they buy from, the brand usually has to comply with their requirements.
Many times, this contract dictates that the retailer has the right to return inventory if it doesn’t sell on time. And by giving you the ultimatum of choosing between temporary inventory profits and the chance to continue working with them.
Obviously, a brand has to endure the damages because the economic development is worth it in the long run.
When there’s a situation of spoilage or expired inventory, retailers tend to hold brands hostage by asking the brand to credit an amount to them to make sure the spoilage doesn’t end up costing them.
Selling to Retailers and Resellers
Although a bit controversial, retailers are known to try and sell out excess inventory to other retailers and resellers in the market.
Most often, it’s to resellers and outlet malls that can match their buying costs which is why it’s important to mention what the retailers are allowed to do with excess inventory.
You don’t want to be in a situation where your product is listed on Amazon for a price that you offered your retailer. Aaron says, “This is something that can be difficult to prove and even if you do prove it, are you willing to tell CVS or Walmart that there’s a leakage in their supply chain? Probably not.”
Inevitably, this also means that if your contract doesn’t include these terms, you’ll most likely have to put up with the retailers’ actions to continue working with them.
Deep Discounts
The last thing that a retailer can do when they encounter excess inventory is getting a deep discount from the brand that sold it to them.
This is something that was noticed in 2021 and 2022 when there were several cases of wrong perishable inventories that couldn’t be processed for returns in time. To make things easier for themselves, retailers just offered themselves deeply discounted prices to cover their losses.
Although brands don’t get the prices they originally had quoted, it’s still a better deal than picking up useless inventory and taking your chances in the DTC market.
How Do Brands Deal with Excess Inventory?
Now that we know how retailers do it, let’s take a look at how brands deal with excess inventory challenges.
Resell Elsewhere
Normally, retailers make it clear that they require a bare minimum period of shelf-life, e.g., 6 months, guaranteed in order to compensate for the shipment, labeling and organization times required to get them in the store.
When businesses aren’t able to get the product to the retailer in time, the deal is void and the brand has to go about selling the product elsewhere. This is why businesses are encouraged to never stop DTC sales even when they launch into retail.
DTC and other options such as resellers and outlet malls don’t have a significant shelf-life requirement, making it easier to deal with inventory excess well before they actually expire.
Change Expiration Dates
Although this may not work for everyone, brands can go about changing the expiration date on their products to sell them in the market again.
Not all goods have an expiration date. Tea, plastic goods and several other types of products can last for substantial durations without causing any damage to their value. However, retailers like Walmart can still have mandated expiration dates for all products to make inventory management easier for them.
Since expiration dates are arbitrary, brands only have to recall the products and make changes to their packaging before reselling it in the market.
Of course, the process can also involve getting quality teams to approve the product again as a new one that can be accepted by buyers.
Sell to Expiration Specialists
Aaron states, “There are retail chains and businesses out there that specialize in past expiration or past sale by date.”
It’s important to understand the difference between expiration and best-used-by dates. Although expiration dictates the time that the product will become spoiled or unusable, best-used-by dates are not that strict in comparison, meaning the product will probably be fine for a few weeks beyond the best-used-by date.
This is something that many retailers and businesses specialize in – buying cheaper products that are close to or even beyond expiration and selling them to other markets.
These short lock code or short expiration date markets can typically attract customers that are price conscious and may be looking for immediate consumption.
Recycle the Inventory
Recycling your products is the most efficient way to deal with excess inventory when you have no other option. Even products such as ice cream can be recycled into methane, processed and being sold as natural gas.
Not only is it eco-friendly, but you can also cut your losses by selling recycled material in relevant markets. It’s also one of the best ways companies can justify their product life cycles in countries where environmental regulations require them to take responsibility for their waste.
Add Another SKU
One of the most effective strategies of dealing with excess inventory is to pair up SKUs and sell them as a separate SKU – a bundle or a package combining two or three products that must include 1 or 2 products that are in demand are sometimes paired with the one product that you want to deplete.
Many brands make sure to have an exclusive variety of SKUs specifically for DTC channels like Amazon that come with a discount for customers.
Get Your Supplier to Buy Back
Although a very rare option that only large-scale brands and retailers are able to pull off, it’s also possible to get your raw materials supplier or manufacturer to buy back or even sit on the inventory for you through terms that grant you some time to sell out inventory before having to pay them back.
Wasting the Product
Although it may seem strange initially, some businesses value their brand aesthetics and therefore, don’t resort to reselling or discounting. They would rather destroy the inventory than to compromise on the brand’s image in the market.
As Aaron puts it, “There’s a reason you never see Gucci or Armani on sale.” These brands don’t believe in liquidating their luxury goods, so they’ll either sit on it or destroy it.
Takeaway
Inventory sourcing, production, storage and fulfillment can be difficult challenges for all businesses and there are several ways of dealing with excess inventory at any given stage. However, the question becomes subjective to each business as they navigate through their particular scenarios.
Whether you’re taking your business from DTC to retail or navigating through earlier problems involving inventory, it’s necessary to have strong foundations for your infrastructure in place for challenges down the road.
Get in touch with experts at Izba and let us discuss your needs to scale your business beyond!
