4 reasons for overstock P1

Many companies strive for having zero overstocks, they think that they can hold only whatever they required from their stock norms.

But this will never happen as the simple truth is we are living on a planet that is away from theories and ideality.

We are living in a VUCA world where uncertainty in demand and supply is the new normal and we have to survive and thrive in that world.

Overstock mostly swallows a big bite of total inventory, it's a fact that needs to be dealt with, this chunk in inventory is tightening the cash flow of the company, and if supply chain leaders can optimize this chunk by applying the 4 ways we suggest in this article, then they can free up this tighten cash to flow through many financial purposes for the company to invest in brands and CAPEX's for better business scalability.

Dealing with overstock shouldn't be ignored as most companies do, they think if this chunk of inventory is not sold today, then it will be sold tomorrow.

And this is totally a deceiving behavior as overstock is like a temporary bomb, every day passes, you would acquire a new risk of explosions like (losing shelf lifetime for perishable products, sudden drop in demand, warehouse obsoleteness, theft, and catastrophe), all of those factors can kill the profit margins of the organization in one second if it's not treated with focus.

Companies have to treat this temp bomb very carefully and put a great focus on depleting this chunk of inventory by driving the right functional actions during the Executive S&OP meeting end of each month.

But before dealing with overstock in our inventory, we need to know what is meaning of overstock is?

What is overstock?

Simply it's any stock that is above your inventory requirements or the desired (Stock norms), Stock norms include your cycle stock (lot size) and safety stock.

How "over-stock" is being calculated?

In a nutshell and easy calculation:

Overstock= (Opening inventory of a specific period- Cycle stock- Safety Stock)

Many companies stopped relying on the cycle stock and safety stock and replaced it with cycle time and safety time.

The difference between both of them is cycle stock and safety stock are just a "fixed quantity" in inventory, and replenishment got triggered by the ROP (re-order point).

While Cyle time and safety time are just a function of the new forecasted demand, so it's a "variable quantity" that depends on the submitted forecasted demand for a specific product.

What are 4 main reasons for overstock in the supply chain?

                       1-Supply Challenges

A surprise for you, right?

How come there is a supply reason for the overstock inventory, right?

How come if we order as per our stock norms replenishment, we will end up with overstock? right?

Let me tell you there is not only one reason under the supply, there are 2 main reasons worth mentioning.

A-Wrong ordering:

No matter how efficient your process is, no matter how your ERP is effective, you are still exposed to human errors and sometimes even system errors happened in calculating the net requirements from one supply chain node to another.

Most of the wrong ordering happened because of the master data hygiene and maintenance, if the product master data is not updated frequently, then you are at risk of having an extra inventory stock and sometimes even slow-moving stocks.

Recommendations:

To overcome this challenge in the system, we propose to have a governance process by having frequent master data maintenance cycles for all the products.

B-MOQ (Minimum order quantity):

I name this MOQ as the hidden inventory devil.

Most companies don't understand the magnitude of this challenge and if they keep ordering without any awareness, how this could negatively impact their inventory levels.

Not all products that have MOQ would have an issue in inventory, not at all.

The issue happens when the MOQ is higher than the desired cycle stock or cycle time.

If our cycle stock is 1000 pieces, and the MOQ is 5000 pieces, then when a supply order is raised, it won't be raised by the 1000 pieces that you need, but with the 5000 prices, which means that you will have an overstock with 4000 pieces in your inventory.

Recommendations:

You can get your free supply chain course on how to reduce the MOQ in the supply chain from here:

Enroll for free now

                    2-Logistics challenges

There are 2 factors that influence the logistics challenges:

A-Internal logistics challenges:

Have you ever faced that situation before in one of the supply chain nodes of your company?

Suddenly you have excess stock from a specific product, you checked the previous opening inventory, you checked the inbounds and outbound during the previous period, but still, the closing inventory is not balanced at all with the formula.

You would wonder why this formula is not balanced, right?

Closing inventory=Opening inventory-outbounds+inbounds.

Simply because there are hidden reasons beyond this simple calculation.

Those reasons could be

A-Cycle count with positive variance between the physical stocks.

What if during the cycle count in the warehouse, there were excess stocks that were not captured in the ERP, then what would happen.

The excess stocks have to be cycle counted in the ERP system to show the reality of the stocks.

That's why this cycle counted stocks were missed from the above formula, we consider these extra stocks as unplanned inbound in the formula.

some examples could be in ERP systems like system BOM (bill of materials) variance are not updated as per the reality or some lack of system transactions.

B-Releasing blocked stocks, what if there were some blocked stocks and for a reason, the quality team releases those stocks from blocked locations into the unrestricted, isn't it an excess stock that was not taken into calculations?

Recommendations:

Revisiting all the process gaps with functional accountability in the supply chain, assessing all the gaps, and closing them the soonest with frequent governance.

B-External logistics challenges:

One of the biggest external risks of overstock is customer returns, as it's something out of the internal supply chain of the company.

Despite the importance of the supply chain returns and the effect of it on the inventory, it's still one of the most ignored downstream processes inside companies.

Most companies think once they invoice to the customer, then the job is over, but this is a totally wrong perception.

Returns and reversal play a big role in the order-to-cash cycle between a supplier and a customer.

The average returns or reversals vary from industry to industry.

It varies from 0.2% to 9% from top line sales.

There is an inversely proportional relationship between the rate of retune and the product shelf life.

The less the product shelf lifetime, the more rate of returns could be.

For dairy and bakery industries could have a higher rate of returns because of the short lifetime of the product.

For those industries, there is a provision line under the company P&L which is fully dedicated to the Returns provisions as it will sooner or later affect the Profit margins of the company.

Recommendations:

All companies should have very clear and agreed return policies with their customers.

This has to be documented and agreed upon between both parties stating all kinds of liabilities and risks in inventory.

For B2B environments, this could include the leftover policies for new product launches (innovations) in addition to any failed promotions in trade.

Getting into this contractual agreement can save tons of agonies in supply chains for short and longer terms.

In this way, there would be great control over all the external factors of the supply chain returns for any organization.

There are another additional 2 reasons for overstocks that will be shared during next week's newsletter part 2.