Definition: When a business has more inventory than it needs, it is called an inventory surplus.
The main scenarios that lead to a surplus inventory are inaccurate forecasting for demand and/or buying items in bulk to get the benefit of economies of scale.
Other, more minor, reasons can be changes in market conditions or changes in government policies.
Advantages of Inventory Surplus
- Safe from inflation if extra quantity is required
- Increases the value on the balance sheet
Disadvantages of Inventory Surplus
- Requires space for storage
- Shelf-life expiry items can expire
- Disposing of extra inventory is costly
- Legal issue if caught with expired items
Identifying Surplus Inventory
Identifying surplus inventory is easy. Every inventory has a required limit. If the stocked quantity exceeds the required limit, then the extra inventory is the surplus quantity.
Is an Inventory Surplus an Asset?
Yes, sometimes it can be an asset. For example, if a business has extra land, which has monetary value, the value of this asset increases as time passes. Businesses can get funds by liquidating these kinds of assets.
Other examples of such assets can be spare parts for critical equipment. Often, manufacturers stop producing equipment and offering support. In these cases, businesses can sell these spare parts at high rates to other businesses that can use these obsolete equipment and will need spare parts for maintenance or during a breakdown.
Sometimes surplus can be a liability.
For example, a business dealing with dairy products or vegetables can be pressured to sell surplus stock. These items can expire – allowing no one to use them and leading to a loss for the company.
Sometimes legal compliance is an issue. Businesses cannot hold and sell expired items, especially in a pharmaceutical company where regulations are tough. Keeping expired medicine or food items is a serious health and safety issue.
How to Manage Surplus Inventory
Managing surplus inventory depends on the type of inventory.
For example, if it is textile and cloth, businesses can offer discounts or sales to reduce the inventory and make space for new arrivals.
Food or dairy items can be offered at a huge discount or converted from one form to another. For example, expired milk can be converted into yogurt.
If it is medicine, the business might need to discard them if they can not sell them.
For recycled items, they will recycle them.
Sometimes donating is also a good option to eliminate surplus inventory and support a social cause.
However, the best strategy to avoid surplus inventory is to buy only what you need. Buying in excess or greed for discounts can cause an inventory surplus that should be avoided.
Manufacturing industries can use Just In Time (JIT) methodologies to reduce the surplus inventory.
Summary
An excess inventory is a surplus inventory and is a cause of concern for the business. Businesses should avoid holding excess inventory as it is a loss to the business and sometimes can cause health and safety issues in some industries.