In this article we will talk about Why is it bad to have excess inventory and what are its disadvantages? Before, the inventory is done, raw materials and products waiting to be sold or shipped to customers, this being part of the company’s assets.
Despite being part of the assets of a company, we could assume that the more inventory it has, the greater its assets, but the situation is not.
And it is that excess inventory can imply that there is more supply than demand, as a result of several factors, such as increased competition, economic issues or change in the purchasing patterns of our customers.
This excess inventory is detrimental to any company, since it brings with it an increase in the cost of storing the excess inventory, increases losses due to obsolete products, etc. Next, we will mention and explain some of the disadvantages that excess inventory can bring to a company.
Disadvantages of having excess inventory
Having an excess of our inventory has consequences for our company, affecting the achievement of the proposed objectives. Consigo results in obsolete products in inventory, liquidity and profitability problems. Next, we will see some of these.
Obsolescence of products in inventory
The world is moving faster and faster, which is why, over the years, we are more exposed to our inventory becoming obsolete. Therefore, it generates a loss when these products are devalued. It is estimated that excess inventory brings with it an additional cost of between 25% and 32% per year.
Liquidity problems
Many companies have in their business plan to replace what is invested in inventory with sales, but if money is invested in inventory that is not used, it results in not having money to cover other company expenses.
If the inventory is perishable, we would be talking about the worst case scenario, because we should launch promotions, to see if we can get rid of the products in inventory that can be damaged.
As if that were not enough, when paying taxes, taxes are taken into account, which takes away even more liquid money in taxes.
profitability problems
We already have obsolete inventory, our liquidity is reduced, and we have also lost sales opportunities. This could mean a loss of value for our company, since investors lose confidence due to this negative situation in the company.
How can I avoid having excess inventory?
We have already seen the clear disadvantages that having an excess of inventory brings us, knowing this, we must then briefly see some options that we have to avoid excess inventory.
Before continuing, it should be noted that an effective methodology is Just In Time, which consists of reducing the inventory, only to what is going to be used. This is the methodology used by Toyota, because it avoids excess inventory. Here are some of these ways to avoid excess inventory.
Managing the order to suppliers
Over time, we may choose to only receive products when necessary. Although there are volume discounts, these discounts are not always beneficial for the company as we have already seen, so through a good relationship with our suppliers, a good price can be achieved for the quantity that we only need.
Have real-time reports between departments
Another option that can help us prevent excess inventory is better communication between the different departments of our company, giving them access to reports instantly, being useful for the inventory department to know about the situation that the company has, avoiding the increase in errors.
