Excess stock

What is excess stock?

Excess stock refers to a situation where a business holds a higher quantity of goods or products than what is necessary to meet current or anticipated customer demand. In other words, it’s an inventory surplus that exceeds the immediate needs of the business and the expected rates of sales.

How does excess stock occur?

Excess stock can occur due to a variety of reasons:

• If a business’ demand forecasting methods are not accurate, they might order more inventory than is actually needed to meet customer demand.
• Overestimating demand during peak seasons can lead to excess stock when the anticipated high demand does not materialize.
• Businesses might order more inventory than necessary to avoid stockouts, especially if they have experienced stockouts in the past.
• Shifting customer preferences can lead to products becoming less popular than anticipated, causing excess stock of items that were once in high demand.
• Ordering in large quantities to take advantage of bulk discounts can result in excess stock if demand doesn’t match the order quantity.

What are the risks of excess stock?

Key characteristics of excess stock include:

• Accumulation due to inaccurate demand forecasting, changes in market conditions, or ineffective inventory management practices.
• Increases the risk that products may become obsolete or outdated before they can be sold leading to losses.
• Tying up capital that could be used for other business activities, impacting the cash flow.
• Slows down inventory turnover, which is the rate at which inventory is sold and replenished. This affects cash flow and profitability.