What is overstocking and how to control it? A visual tech approach
Digital transformation, led by 3D and augmented reality (AR) technologies, can not only help organizations keep the stubborn problem of overstock down, but also amplify sales, reduce costs and improve customer experience
- Understanding the nature, cause and impact of overstock in business
- Why digital transformation is key to minimizing overstock
- How 3D visualization and augmented reality technologies are turning the overstock equation back in favor of businesses
What is the meaning of overstocking in commerce?
An overstocked inventory is a complex outcome of forces both internal and external to a business
Overstocking, a term used to define inventory levels in commerce, is a condition that occurs when a business acquires more products than it can sell within a stipulated or efficient period of time. The phenomenon of overstocking is common across a wide variety of industries and product categories. Given that it impacts nearly every key success metric in the modern enterprise — from better planning to shorter sales cycles to improved customer experience — overstocking is an important factor in the survival, success and sustenance of any business.
As a rule of thumb, having more stock is considered better than sporting empty retail stores, which can anger customers and harm a business’s reputation. However, it makes sense for brands and businesses to keep down the volume of stock they have at hand at any given point in time. When considering the scope of the term, it must be kept in mind that damaged goods or products returned by customers are not considered part of overstock.
What are the causes of overstocking?
An overstocked inventory is a complex outcome of forces both internal and external to a business
What causes businesses to load up on goods and inventory they don’t need? Normally, it is the consequence of a host of internal and external events and eventualities. Internal factors that can cause overstocking are:
- Errors in forecasting, which arise from a misjudged sense of demand and supply.
- Inefficient management of the various moving parts along the business supply chain.
- Lack of clear understanding of market forces.
- Fear of running out of stock (the apprehension is well founded: stockouts cost retailers $1 trillion every year).
- Canceled or returned orders.
- Untimely deliveries.
- Old or expired goods.
- Ineffective product promotion.
- Failed product launches.
External factors that can result in overstocking are:
- Unforeseeable economic fluctuations.
- Increasingly complex global supply chains.
- Unexpected changes in customer trends and behavior.
- Industry or domain-specific challenges.
- Environmental irregularities.
- Calamities beyond human control (force majeure).
What are the consequences of overstocking?
From lost revenue opportunities to environmental damage, overstocking can invite a host of problems for organizations
A familiar villain in boardrooms struggling to tackle uncertainty following a debilitating pandemic is overstocked inventory. Also referred to as dead stock, it can be a source of considerable stress for business leadership. Products sitting in storage don’t earn money, but that’s not where the woes end. As unsold items continue to warm retail shelves and occupy paid-for warehouse space, they gather both dust and concern. For one thing, excess inventory — representing ‘lost revenue’ for a business — blocks off vital chunks of capital that could have been invested elsewhere while putting a lid on working capital at the same time. It can heavily restrict cash flows, in extreme cases resulting in the company going out of business or filing for bankruptcy. Extra stock is, additionally, prone to the risk of damage and obsolescence: steadily depreciating in value, it may eventually have to be written off a company’s financial books. Unsold goods also tend to suck real estate space and chip away at a company’s coffers due to their operational costs (OPEX).
Products sitting in storage don’t earn money, but that’s not where the woes end
To wash their hands of liability, companies often have to resort to donating the goods or selling them off at extreme discounts, sometimes at scrap value. Both moves adversely affect business profitability. Sometimes, surplus inventory is disposed of in landfills or dispensed away via incineration (particularly in developing countries), bringing considerable harm to the environment. Finally, wastage as a concept is increasingly attracting outrage at a time when large populations around the world remain impoverished and underprivileged. No matter which way one looks at it, overstocking emerges as a ‘no win.’
How can businesses avoid overstocking?
Technology transformation via digitization can single-handedly help businesses upend their overstocking woes
Industry observers share an eye-opening tale of attribution when it comes to annual loss figures. While overstocking costs retailers $123.4 bn every year, there are other ‘bad guys’ equally harmful to business viability and intricately connected with overstocking that are worth scrutiny as well. Inefficient processes drain $284.9 bn, manual and people issues siphon out $259.1 bn, data disconnect and system bottlenecks eat up $222.7 bn, supplier misalignment consumes $158.5 bn and theft pockets $161.6 bn.
And yet, many manufacturers and brands remain blasé about the malaise. According to Shopify data, nearly 43% of small businesses either continue to track inventory via dated and manual methods, or do not track it at all. That, in an age when inventory tech has made rapid progress, can be suicidal. Today, businesses have software, digital tools and PoS (Point-of-Sale) systems that help get a grip on the challenge of overstocking by:
- Adding efficiencies to stock and inventory management with better forecasting abilities.
- Understanding customer profiles and behavior granularly.
- Monitoring and measuring stock movement and availability in real-time.
- Integrating warehouse activities across locations — such as initiating transfer orders and updating inventory in real-time.
- Optimizing storage space and processes to prioritize items that are most profitable.
- Turning material handling and order picking, which straddles inventory management, order allocation, item dispatch and order fulfillment, and maps to nearly 65% of warehouse costs.
- Prioritizing reorder preferences across item (SKU) categories and retail locations.
- Tracing defective products to their source batch, gaining unprecedented control over disposable stock and empowering teams with manufacture and expiration dates.
- Gaining vital insights into various aspects of the sales function.
Clearly, business transformation via the digitization path is the need of the hour. A simple play for those looking to take the technology path to reimagine their logistical function and rein in overstocking pains would be to agree on targets, choose a tech platform that aligns with their goals and go for full-scale deployment by building a digital culture.
How can organizations hit the correct inventory balance formula?
Getting the inventory equation right can mean a tightrope walk between several divergent forces
Inventory strategy is usually a trade-off between the diverse corporate objectives of cost, cash flow, and sales goals. And while it is key to profitability, it can often feel like a guessing game. For supply chain and logistics leaders, the journey must begin by asking the right questions. Should the business maintain more stock and thus risk working capital, wastage and jeopardized cash flows? Or should it opt for less stock and more working capital, which can also mean running out of supply suddenly, lost sales opportunities and the wrath of the markets?
It all comes down to improving decision frameworks so that the organization can strike the right balance between demand uncertainty and supply continuity. There are two locations along the workflow arc where the ‘mismatch’ between demand and supply usually happens: First, where raw material input meets manufacturing, and second, where manufacturing faces off with finished goods output. Once these two spots have been accurately identified — both systemically and geographically — the focus shifts to the next step: figuring out how much inventory must be maintained. The latter must be done per Stock keeping unit (SKU), per category and per brand since each has a different momentum. To do this, an organization needs to track two kinds of stock cycles. The first is cycle stock, which refers to the volume of goods and products that must always be available to address routine or anticipate-able customer demand. The second is safety stock, which is the buffer or emergency stock needed to hedge the business against changes in production schedules, supply shortfalls from vendors or unexpected spikes in demand.
Organizations can maintain a steady and optimized inventory level by adopting the following approaches:
- Institutionalizing a holistic and organization-wide digital transformation strategy featuring advanced analytics and customized forecasting models.
- Deploying a centralized system of records powered by a single source of truth.
- Reviewing history and decoding patterns regularly.
- Staying abreast of trends.
- Defining and deploying policies.
- Training up teams.
- Implementing cross-departmental collaboration.
- Blending best practices with proprietary playbooks.
How can 3D and augmented reality (AR) technologies help in reducing overstocks?
By amplifying the superpower of demand forecasting, digitization through 3D and AR can help founders and organizations gain new levels of control over overstocking
In the ‘next normal,’ organizational strategies and approaches must be driven by a digital-first mindset. That means keeping the antennae open for new technologies and trends while finding unconventional ways of integrating them into their existing business models to reinvent competitive edge.
Modernization and digitization can transform supply chains into efficient and resilient functions. Indeed, discovering new ways of doing things by embedding digital tools and technology skills into the daily work ritual is a key McKinsey recommendation for resetting the sails of the enterprise. On cue, future first decision leaders have already begun to embrace technology transformation with the help of digital frameworks and next-generation systems. Ninety percent of leaders surveyed shared the ambition to increase the quantum of digital supply-chain talent within their organizations, while over 50% expected to introduce permanent changes to their planning processes.
In this context, 3D and Augmented Reality (AR) technologies present themselves as powerful tools, particularly in the decisive area of demand forecasting. In a time of breakneck change — a function of new purchase behaviors, disrupted logistics and socioeconomic uncertainty — 3D and AR carry the potential to revolutionize inventory planning, helping leaders finally crack the overstocking conundrum.
Prototyping and testing the market with 3D and AR fosters better production decisions, and less unwanted stock. Click in "See in your space" to see this bycicle in your home
3D and AR are all about enriching reality with new layers of digital information in the form of text, graphics, video, audio and animation. These visualizations help the viewer gain fresh insights into a product or a prototype, usually over a virtually immersive experience. 3D and AR tech let users:
- Reconfigure by freely rotating, turning and flipping to understand an item from novel new angles, thus gaining a better overview of it.
- Alter color and hue at will to experiment with look and appearance.
- Transplant products from print catalogs, brochures and e-commerce website pages right onto their own homes and workplaces virtually to figure out whether they will be a good ‘fit’ before purchasing.
- Some 3D and AR services, such as the one from the Enhance 3D and AR solutions team, also allow manufacturers and brands to gauge the pulse of their markets without the hassle and cost of a full-blown market survey and product acceptance levels with granular, real-time feedback.
- Finally, as technology keeps improving, 3D and AR become easier and easier to adopt. The gadget-less and web-based interactive experience from Enhance 3D and AR solutions, for instance, is 100% hands-free, and lets product, marketing and founder teams integrate it into their workflows effortlessly over a SaaS format.
How companies are utilizing 3D commerce to prevent overstock
Industry leaders and stats have both started to tilt towards 3D and AR tech
- DHL tied up with augmented reality (AR) hardware companies Vuzix and Google to solve niggling warehousing and logistics pain points. This experience elevated efficiencies, reduced costs, improved safety, minimized errors and boosted ROI and DHL Supply Chain leaders decided to deploy AR solutions across numerous industry sectors.
- The National Health Service of the UK experienced a 95 percent increase in both time efficiency and cost when it ran an AR pilot across several hospitals to track inventory and patient data.
- Surveys across North America and Europe show that 34 percent of respondents believe AR to be an important last mile technology to invest in.
3D and AR tech are adding sense and sanity to the overstocking riddle
Unique ‘try before you buy’ visualization features are generating game-changing insights into product understanding, market sentiment and purchase intent
3D and AR are making shoppers and investors more confident by furnishing them with all the data they need to make smart and informed decisions. Not just auto firms — every brand can have their very own version of the ‘test drive’ now, as it were. For organizations, logistics service providers and warehouse owners, digital transformation fueled by 3D and AR translate into the holy grail of all commerce: leads and expressions of interest that are pre-filtered by nature and carry both significantly higher intent and markedly higher probabilities of closure. The numbers check out. E-commerce giant Shopify reveals that buyers can be 44 percent more likely to place an item in their shopping cart once they have engaged with it in 3D. And, as an extension, there are far fewer chances (40% to be exact, according to Shopify) that the item will be returned. Given that returns are a $550bn cross for businesses globally, that ought to come as a big relief for retailers and brands globally.
3D and AR can also influence overstock indirectly by helping logistics and delivery players rev up every parameter. 3D and AR technologies can add efficiencies to the loading process with ‘pick up by vision,’ quicken operations by empowering teams with spatial 3D views to locate the nearest item on the shelf and even optimize last-mile cost and time by suggesting the best delivery routes.
As a bonus, 3D and AR can help managers visualize goods virtually in a storage setting to decide on warehouse facilities that are the right size, shape and fit for them.
With 3D and AR capturing buyer demand and improving technologies, company owners and revenue leaders can now focus on taking dynamic and profitable decisions, namely, keeping overstocking at manageable levels.
This means everything from better planning warehouse real estate, replenishing stocks, guarding against shortages, orchestrating inter-store transfers, coordinating inventory (between store, warehouse and fulfillment centers), sharing timely heads-ups with supply partners and vendors to adjusting against market shifts, reducing lead time, curbing environmental damage and responding to buyers in real-time to amplify customer satisfaction. When one throws the other big stat into the mix — that a whopping 93 percent of GenZ (a demographic wielding increasingly more purchasing power) express a clear interest in using augmented reality for their shopping — the case for 3D and AR adoption becomes more of a question of when than if.
The journey into 3D/AR country can begin with just a device and an internet connection. That’s all a demo requires. For brands needing to stay in step with consumer trends, manufacturers of heavy and unwieldy goods, organizations producing big-ticket items, companies with complex product development processes and entrepreneurs looking to validate blueprints before they hit the warehouse, the entry barrier to the next level of performance has never been lower. And the promise of spoils, never greater.