COST OF AN OVERSTOCK
If overstocks carried no negative consequences, these decisions would be easy – you’d always carry way more inventory than you would ever need. Unfortunately, that is not the case, and your inventory “safety net” increases in cost as it increases in size. Here are some common costs associated with overstocks:
1. OPPORTUNITY COSTS
For most companies, inventory costs money, and that capital can’t be deployed elsewhere if it’s sitting around in the form of overstock. If it’s products, you’ve likely paid some amount of money to have those goods available to you. If it’s personnel who provide services, it’s what you’re paying them regardless of whether or not they’re working and generating revenue.
2. HOLDING COSTS
Unless you’re product is digital or virtual, you’ll be paying for physical space to hold your inventory. For products, you’ll be paying for warehouse space and, depending on the product, additional costs for features like high security or climate control. For personnel, it might be office space where they can keep busy and remain available until a paying job comes along. Even if your product or service is digital or virtual, you might have overstock costs in the form of extra server capacity, bandwidth, or storage.
3. EXPIRED GOODS AND DISPOSAL COSTS
Most physical products have value that is perishable, although their shelf lives might vary greatly. Once they expire, not only do you have to replace them, but you might incur significant expense while disposing of your expired goods.
Meat, fish, poultry, and produce come to mind as highly perishable inventories that can spoil while waiting to be sold. Pharmaceuticals eventually expire and might require extra expense to dispose of properly and legally. Apparel and shoes go out of style and might need to be sold at a loss. Software can become obsolete. Even if you’re delivering services, your personnel’s knowledge could become outdated and your "disposal costs" might be in the form of severance payments or retraining.