How to Avoid Negative Inventory or Excess Stock in the Warehouse

24 May 2022

Discover the tips that will help you eliminate stockout (negative stock) and overstock (excess stock) in your warehouse.

Maintaining ideal stock levels in a warehouse is usually easier in theory than in practice, isn’t it? After all, when dealing with daily demands and their fluctuations, it’s difficult to know how much of each product should be stored. And having this control is essential to avoid two situations that cause significant losses to the company: stockout (negative stock) and overstocking (excess stock).

If you store too much, you risk expiration, damage, or obsolescence. On the other hand, if you maintain just enough quantity, you might miss out on significant sales opportunities, especially during peak periods. In both situations, financial losses are certain.

According to Retail Wire, excess stock costs the average retailer 3.2% in terms of missed revenue, while stockouts cost 4.1%. That’s why you need to work to avoid them in your warehouse.

Problems related to excess inventory

First of all, it’s important to remember that inventory is one of the most valuable assets a company has and therefore must be well managed. When this doesn’t happen and there are many items left in the warehouse for months or even years, it means there’s immobilized capital that might not even return to the cash register. In short, working capital and liquidity are reduced.

It’s also worth noting that the product has its storage costs. In other words, if stocks are excessive, the company is likely to spend more. And it’s always good to remember that every square meter of your warehouse is worth a lot!

There are also situations related to price fluctuations. Today you can buy a product from the supplier for an amount X. Tomorrow that same item might have depreciated in the market and be worth less than what you paid. And you certainly don’t want that to happen.

Problems related to negative inventory

Lack of stock is synonymous with dissatisfied customers and a low company reputation. If the consumer wants to buy a product, looks for your store, and is informed that it’s out of stock, the movement is only one: migrate to the competitor. And it may be that this bad experience leaves a mark, causing the permanent loss of the customer.

In peak demand situations, stockout takes away your company’s opportunity to generate more revenue. Those who were prepared for the moment will earn more and, depending on the service offered, can also retain the customer.

For these and other reasons, it’s necessary to eliminate cases of negative stock (stockout) from the warehouse. The good news is that there are ways to avoid them and eliminate excess stock. Check them out below.

Tips to avoid negative inventory and excess stock

In the following topics, we present tips on actions you can take to avoid negative inventory and excess inventory. But before discussing them, let’s remember: even with all the strategies and technologies, the main foundation for them to work is to have solid inventory management.

#1 Manage your lead times

The time between the purchase order and the final delivery date by the supplier, called lead time, is of fundamental importance. Therefore, not only is it necessary to have good suppliers who are reliable and meet deadlines, but also efficient communication with them. Your goal is to minimize lead times so you can meet customer demand and minimize the time between paying for inventory and receiving revenue.

#2 Have accurate data on your inventory

It’s quite common in warehouses with a high number of SKUs that the physical stock does not match the stock in the system, i.e., with poor accuracy. This situation can cause several problems leading to both stockout and excess inventory. The Purchasing team, unaware of the exact quantity of items stored, might fail to place the order with the supplier. The sales team might sell a product that is not available.

To prevent this from happening, the best solution is to equip yourself with a WMS system, a specific software for managing stock and operations in a warehouse. The system works integrated with the ERP and sales software and updates all warehouse data in real-time. Moreover, by registering the ideal stock level, the WMS itself will timely issue notifications to request a new shipment from the supplier. Another advantage is the realization of cyclic inventories, to ensure maximum accuracy. With WMS, the chances of stockout and excess inventory are significantly reduced.

#3 Calculate the reorder points

A reorder point (ROP) is the right time to make a restocking purchase. It represents the minimum stock level of a particular product. When this value is reached, a new purchase order must be placed with the supplier immediately.

There are three steps involved in calculating your reorder point:
– Safety stock levels established to avoid stockouts;
– Lead time or supply times from suppliers;
– Average Consumption: the average daily consumption of goods.

The formula is as follows:
Reorder point = safety stock + (average consumption x lead time)

Your reorder points are likely to be different for each product you sell: items will likely have different demand rates and vary in the time needed to receive the replacement delivery.

#4 Have an accurate demand forecast

Demand forecasting based on reports and historical sales data helps you define the ideal quantity of products that should be purchased from the supplier to fulfill orders throughout the year.

Moreover, predictive data analysis better prepares you to make business decisions based on previous months, helping you estimate the correct size of your inventory.

It’s necessary to have reliable data and closely monitor all consumption trends, both in relation to particular periods of the year (season change, Christmas, Black Friday, etc.) and the categories of products you sell, following trends, consumption preferences, among other related factors.

#5 Maintain a safety stock

We know that demand fluctuations, supplier issues, and other unforeseen events are not rare. To face them without risking reaching negative stock, the most recommended thing is to have a safety stock.

The quantity to be defined depends entirely on your business, but to calculate it, it’s important to consider all demand variability, supply times, and the importance of each product to your business.

Accuracy and visibility: the foundation to end negative inventory and excess inventory

The presented tips show us two points to prioritize in management to avoid negative stock and excess stock: accuracy and visibility. It’s necessary to have reliable and real-time updated data, and these must be available always and everywhere. With accuracy above 99% and full visibility of your chain, the chances of errors in calculations and decision-making are significantly reduced. Rely on technology for this!