Do you know what e-commerce needs the most? It needs to fulfil its customers’ demands on time. In this process, they are required to restock their inventory. It can save them money and effort. But some e-commerce businesses need to plan.
As a result, they end up overstocking. This can also lead to substantial financial losses. Therefore, it is necessary to know how to avoid it.
Overstocking occurs when you order more items for sale than you need. It gets left behind on the shelf. As a result, overstocking locks up what storage space you have.
It leaves your inventory worthless.
Overstocking is a primary concern for e-commerce retailers, costing them a lot of money.
It is essential to learn about the disadvantages of overstocking.
Difference Between Overstock and Understock
Before learning more about overstocking, it is essential to understand all the terms clearly.
Overstocking refers to the purchase of excess items. In other words, overstocking is when an e-commerce business buys more than it can sell.
Understocking means when a business buys less than the necessary limit. As a result, they go out of stock.
This, in turn, affects their sales.
No matter the scenario, it hampers the business and leads to financial losses.
Drawbacks of Overstocking
Here are the major shortcomings of overstocking:
1. More Funds Required
The major drawback is that you must spend a lot to ensure surplus stock stays in good shape. This can help avoid further financial losses.
2. Warehouse Costs
They have to take care of the warehouse costs as well. They also have to handle the human resources that go into running it. It is also a massive waste of space.
That space could be used for storing products that sell well in the market.
3. Blocks Inventory Capital
It is an undeniable fact that stocking inventory blocks working capital. In other words, the money you spend on inventory will only return if you sell the product.
4. Expiry Date
When the product has an expiration date, you will ultimately lose it too. If you sell the product on time, you will have to earn money for both the space and the product.
5. Lack of Space
The overstock stock will also block the introduction of new products due to lack of space. This is an issue that small companies or startups usually have to deal with more planning.
Why Do Businesses Overstock?
To understand why businesses overstock, looking at a few essential factors is essential.
These are as follows:
1. Fear of Going Out of Stock
The main reason is that businesses are afraid to run out of stock. It leads to such high costs that they react poorly out of fear and start overstocking.
2. Warehouse Mismanagement
Specific errors in management or warehouse management can cause overstocking. For example, a lack of visibility or expertise in inventory management can lead to such cases.
3. Profit Margins
A lack of understanding of inventory costs is another crucial reason. It means you need to learn about your sales and profit margins.
4. Bad Pricing Strategy
Certain products are in demand during a particular season. Businesses must strategically plan the amount they need for a specific season. It could be because they failed to sell it due to a lack of marketing.
It could also be an outcome of failing to price it adequately.
5. Poor Sales Prediction
Businesses that fail to predict the future demand for their product might face the same scenario. It is essential to look closely at sales numbers and order accordingly.
For example, businesses need small quantities when sales slow down.
6. Supply Chain Issues
Some businesses might think ahead and stock up to avoid supply chain issues. This could also lead to overstocking.
How to Avoid Overstocking?
To avoid overstocking, refer to the following points:
1. Plan Well
Businesses need to plan stock prices methodically and stock them up promptly. They can set aside a few extras for emergencies.
2. Use Inventory Management Software
They can opt for inventory management software to give them a glance at their inventory levels.
3. Use of Market Knowledge
They should be well aware of the effects of seasonal changes on their products.
4. Good Supply-Chain
Businesses must create supply chain resilience.
Hence, overstocking can cause a lot of harm to an e-commerce business. It will not only cost them a lot of money. It will also consume space, obstructing the storage of necessary items or sellable goods. Various factors lead to overstocking.
Similarly, for each reason, there is a solution. A business can prepare a proper storage structure and avoid any further financial loss by adhering to it.
Follow Legal Tree for the latest updates, news blogs, and articles related to micro, small and medium enterprises (MSMEs), business tips, income tax, GST, salary, and accounting.