Become an inventory optimization expert

by | Aug 6, 2024 | Data Management, Inventory Management, Order Management, Suppliers

Today’s supply chain is full of disruptions that are often completely out of suppliers’ control. With unexpected delivery and procurement obstacles, it can be difficult to secure the right amount of on-hand inventory, resulting in overstocked or understocked warehouses. Though many outside factors can play a role here, inventory imbalances can happen when suppliers are forced to make tradeoff decisions in procuring goods.

Excess inventory

Excess inventory occurs when a business finds that it has more inventory on hand than is immediately required, necessitating costly storage or majorly discounted pricing.

What causes excess inventory?

While excess inventory can sometimes be spurred by supply chain disruptions, it’s often due to poor forecasting, overproduction or unexpected shifts in customer demand.

Why is excess inventory bad?

When suppliers have too much inventory on hand, cost efficiency immediately takes a hit. There are two main options that suppliers have when they’re faced with excess inventory: sell the extra products at a reduced price to clear up warehouse space quickly (which drives down margins) or store the excess inventory until it’s sold at its regular price (driving up overhead costs). Either way, excess stock prevents a company’s ability to stay agile. Suppliers must look at excess stock as a:

  • Waste of money: If they need to get rid of the extra items quickly, they’ll likely have to lower the price significantly to ensure it sells. This pay cut can be extremely painful for a brand, especially if it happens frequently. Ultimately, this pay cut will impact profits as company margins decrease.
  • Waste of money and resources: If they choose to keep the extra items in stock, they lose space for other items and carry the cost of storing excess inventory. That excess inventory may sell at full price eventually, but the brand will take a hit when they can’t keep other items in stock, especially if it takes a long time to make the extra room.

It always costs money to store goods, even in the correct quantity. In this case, the supplier’s overhead costs are driven way up, limiting their cash flow. Agility is affected when a supplier is forced to make this choice, one way or another, as cash flow is restricted. This causes efficiency and flexibility obstacles.

Low inventory

Low inventory occurs when a supplier’s inventory dips below its normal functioning quantity. Each day that items are sold, inventory naturally dips. When it dips too low, and a supplier cannot meet customer demand, problems arise.

What causes low inventory?

Typically, low inventory is caused by factors outside of the suppliers’ control. Supply chain disruptions, such as shipping delays or freight obstacles, can be caused by a variety of unpredictable issues.

Low inventory can also be caused by breakage and loss, which can occur at any point during the supply chain process. However, suppliers are responsible for low inventory when it’s caused by improper storage loss (i.e., with perishable goods) or poor planning and ordering practices.

Why is low inventory bad?

When suppliers have too little inventory on hand, they miss out on sales and revenue opportunities. In some industries, keeping a lean inventory can keep costs low, but those companies are also taking the risk that they could suddenly run out due to a large influx of orders or a supply chain disruption.

While low inventory could be a relatively small problem that’s easily fixable, it depends on the nature of the business. In some cases, a shortage of even one item can grind the rest of the business to a halt, costing valuable time and money.

Ultimately, low inventory is bad for suppliers because it makes customers unhappy and more likely to take their business elsewhere, sometimes even harming the brand’s reputation.

Why is inventory balance important for suppliers?

Suppliers must have the right amount of inventory in stock to meet customer demand. However, inventory also plays a role in planning purposes. Brands use inventory metrics to know what items to reorder, in which quantities, and when they’ll need the shipment. Without this data or with inaccurate inventory data, suppliers have no way of tracking what’s selling and what’s staying on the shelves.

Some suppliers may rely on their point-of-sale (POS) system to track historical order data. However, this can be misleading as it only tracks what customers are buying—it doesn’t capture trends or detailed item data.

For suppliers, understanding sell-through data is extremely important. Sell-through data tells brands more about how their products are selling, which makes it easy to compare different variables and measure where improvements could be made. For example, if a product is flying off the shelves in one city but is collecting dust in another, the brand needs to know why. Then, they can make informed inventory decisions and communicate changes that need to be made to boost sales across the board.

How can suppliers fix their inventory problems?

Now, more suppliers are investing in automated solutions that help them manage and organize their inventory and item information.

With a solution like SPS Commerce Fulfillment, suppliers can gain access to real-time inventory updates from multiple partners. Inventory Service, built into Fulfillment, ensures that suppliers can streamline their inventory updates, save time and grow their business.

For better data gathering, enter SPS Commerce Analytics, our solution that makes it easy for brands to track inventory and order data. This way, they have more time to work towards growth rather than manually tracking inventory levels.

To learn more, reach out to SPS Commerce today.

Morgan Asplund
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