The Disadvantages of Holding Too Much Inventory on Hand
Proper inventory management is a key part of helping retail and manufacturing businesses operate efficiently. Inventory is the largest asset for many of these businesses. They might hold excess inventory for many reasons, such as guarding against shortages, ensuring bulk purchasing discounts and dealing with shifts in customer demand. While there are advantages to holding too much inventory on hand, there are also disadvantages that companies must consider when implementing an inventory control plan.
Storage capacity and the related storage fees are a concern for companies holding more inventory than is needed. It takes space and resources to hold inventory. Companies lose profit by paying labor for maintaining the storage space, organizing the stock and transporting the stock from one place to another. Companies that rent storage space lose additional profit by paying rental fees to store unused stock.
Companies that keep up with buying trends might find overstocking inventory to be a disadvantage. Consumer tastes change quickly and products can become outdated if they sit around in inventory for a few months, particularly when it comes to clothing and other fashion items. In these cases, a warehouse full of trendy product quickly becomes a warehouse full of devalued product.
Overstocking perishable items often results in the items sitting in storage past the recommended “use by” date. For example, food businesses cannot sell out-of-date products because of the risk to the health and safety of customers. In these cases, overstocking results in items that must be thrown out, meaning they are a total loss.
A business owner who overstocks often finds himself in the position of needing to sell the inventory at deeply discounted prices in order to clear up space for new inventory. By selling discounted stock the business suffers low margins and profits.
A major disadvantage to holding too much inventory on hand is the negative cost implications. Purchasing any type of inventory or product ties up the funds of the company and prohibits those funds from being used elsewhere in the business. Holding too much inventory ultimately affects the cash flow of the business, especially when the inventory is sitting in storage and is not being sold for profit.