If you are a professional buyer or seller of physical goods, or if you are part of a company’s supply chain or logistics management, you are surely familiar with the concept of ‘overstock’. But what does overstocking mean?
We’ll be talking about this topic quite a lot on the iBlevel blog.
In this first post we will define the concept and review the products that are most likely to generate overstock. Later on, we will see what factors lead to overstock, what the consequences are, how to deal with this problem and how certain products can be sold.
First of all, we want to point out that dealing with an overstock situation is a fairly common logistical problem for manufacturers or sellers of tangible goods. In most cases, overstocking problems can be avoided through proper planning and coordination of the logistics chain. However, there are also situations in which overstocking is unavoidable and the company is forced to make a decision on what to do with the goods it has immobilised in the warehouse.
What does overstocking mean?
Overstocking is the accumulation of products or raw materials that remain tied up in a warehouse due to lack of turnover and demand.
In other words, we will be overstocked when more goods enter our premises than leave our premises. Overproduction is defined the same way. We face an overproduction situation when we have manufactured more products than we are able to sell on the market.
In both of these cases it is a matter of discrepancy between supply and demand and both cases produce a traffic jam that can have serious economic consequences for the company.
In most cases, overstocking problems can be avoided through proper planning and coordination of the logistics chain (…) there are also situations in which overstocking is unavoidable.
What kinds of products are most likely to overstock?
Actually, any type of physical product or any raw material can become overstocked, but there are some products and some circumstances where the risk is higher. We have classified these circumstances as shown:
A product life cycle is the journey of a product since the moment it is launched onto the market until it is withdrawn from it.
This product life cycle can be divided into four phases:
- Introduction: This is the first phase and it refers to the stage when the product is launched on the market. At this time, we do not expect there to be a peak in sales, instead, we seek to make our first approach to the market and with patience and determination gain their trust.
- Growth: This second phase revolves around growth. We are gradually seeing an increase in our sales figures and thus also in profits. It is a very exciting phase, because we’ll finally start to see results of our hard work.
- Maturity: After a successful peak in sales we are entering the third phase of the life cycle which is characterised by stability. In other words, sales are stabilised, our profits are tangible and we have gained the trust of our customers. This is a very good phase and we’d want to remain here as long as possible.
- Decline: But, as we all know, all good things must come to an end. Once we’ve reached this fourth stage, we are considered to have reached the end of the product’s life. This is when sales drop significantly, profits decrease and the product or brand, gradually, becomes unprofitable. Before entering this phase, we will do our best to stay in the maturity phase as long as we possibly can. But there are factors that simply do not depend on us.
Generally, when we enter the decline phase, it is because (1) our product has become obsolete, (2) we are unable to meet new demands, or (3) the competition has grown to such an extent that you are overshadowed. And, beware! because any product or brand, however strong and solid it may seem, can fall into this phase. Remember Nokia? For years this brand was the undisputed leader of the telephone market, until, in one day, smartphones showed up and its products became completely obsolete.
Note: A multi-product company can have one or more products at the end of its life-cycle and continue its business activity without major complications. In this case, he’ll simply have to assume the issue and reorient the business strategy to minimize financial damages.
However, for companies that specialize in a single product (or family of products) this could be the end of its existence. In this case, he shouldn’t underestimate the economic value of the remaining assets and resources and try to make the most out of it.
This can be any product, from any brand and any type of company. A product will be ‘discontinued’ when the company decides to change its current product catalogue and launch another.
This can be done (1) to meet new market trends, very common in the fashion industry; (2) because they want to innovate and thereby avoid becoming obsolete in the market, as is often the case in the technology industry; or (3) maybe they just want to change their brand strategy, work on their reputation or target new markets with a new catalogue.
Unsaleable products due to change of regulations
In a world where consumption has become the new religion for many, where there is so much production and so much turnover of goods, it is not surprising that there are also constant legislative changes that try to mitigate, to the extent possible, the impact of this exercise.
In most current cases, trade regulations change in order to mitigate the negative effects of high product turnover on the environment and/or public health.
For instance, an example that we all know of, are the measures imposed on car manufacturers to avoid excessive emissions of polluting gases.
Another current example is the standardisation of smartphone chargers. Surely those of you who have had mobile phones before the “smart” era will remember that back then each brand of phone had its own charger. The truth is that it was quite common to see drawers full of chargers at our homes. And if we switched mobile phones, that charger was no longer useful.
But with the emergence of smartphones, brands were forced to create universal chargers. Literally, forced. And so the USB cable chargers that we all know today were born. Much more practical, really. Although the regulation was not changed for the sake of practicality.
Every year, 50 million tons of electronic waste is generated, a number that will triple in the next three decades.
Currently, there are basically two types of chargers, iOS chargers and Android chargers. Now however, the EU intends to take a final step towards the standardisation of smartphone chargers, to significantly reduce “electronic waste”. These are necessary measures. According to a report by the United Nations University, 50 million tonnes of electronic waste are generated each year, a number estimated to triple over the next three decades, according to an article published by ‘SER’.
Let’s move on to the last category.
Overstock and overproduction
In the first category of this classification, we talked about end-of-life products. Those that for one reason or another are no longer in demand. In this last category we are refering to any type of product. Even a product that is very much alive, that’s part of our catalogue, that meets the regulations and is in demand, can easily overstock. But, will the consequences be just as harsh? Let’s see.
If we make a mistake in our calculations and buy or manufacture more goods than the market (or rather our market) is able to absorb, we will surely overstock or overproduce.
Consequently, this can happen to any product, although we might see it clearer if we add the seasonal factor into the equation. Just think of Christmas decorations, Valentine’s Day gifts, heating appliances, bathing suits or inflatable mattresses, for example. If these types of products are not sold in time, they can stock up. And if they do, we face the risk of not being able to sell them next year due to changes in market trends, for example.
However, an issue like this certainly doesn’t translate into the closure of a company, but it will, for sure, lead to financial consequences. If this has happened to you, you should interpret this situation a warning sign and better your purchase and/or manufacturing management.
So, with this categorisation we conclude the introductory post about the over-stocking. We hope that some of this information has been useful to you. If so, keep following us, we will soon publish a follow-up article on this subject.
Do you suffer from an overstock situation in your organisation? Do you have immobilised merchandise that generate more costs than profits? Contact us for a private and personalised consultation.
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