Optimizing promotions to reduce overstock

To optimize inventory management and promotional policies, companies can rely on predictive models based on artificial intelligence. With predictions in hand, informed and facilitated decision-making allows companies to meet customer expectations quickly while keeping costs down.

Uncontrolled inventory management can lead to excess inventory with many drawbacks. Overstock can be reduced through various processes, including optimized promotional operations. These should be well thought out and timely to avoid damaging the company's reputation the next time policy changes.

What is overstock?

Overstock, or excess inventory, refers to the stocking of too much raw material or finished goods, far in excess of customer demand. This excess inventory is usually created as a result of poor planning and coordination between the supply chain, sales and production. Overstocking occurs primarily in logistics facilities that supply or store mass-produced products.

A company can be led to produce excess inventory for a variety of reasons. On the one hand, factors internal to the company can disrupt its inventory management. This can be due to incorrect sales forecasts, overstocking from the first order with the supplier or even errors in logistics planning and organization. On the other hand, these overstocks can be explained by factors external to the company: a drop in demand, out-of-season products, the entry of new competitors on the market or a drop in purchasing power.

It is possible to distinguish two main types of overstock: residual stock and dormant stock. Residual stock consists of products that have not yet been sold after a promotional operation of a certain duration. Dormant inventory is inventory that stops being sold suddenly, without any predefined reason, after a history of high sales: this is seasonal inventory. In this case, the supply chain tends to malfunction, with orders or production continuing despite the excess of products in stock.

One thing is certain: overstocking is costly for companies. Indeed, a poorly controlled quantity of products generates unnecessary logistics costs related to storage (buildings, machinery, electricity, salaries, maintenance costs, etc.). It also leads to poor organization of the goods in the warehouse and thus an increased risk of stock deterioration. Neglecting the control of incoming and outgoing goods can then lead to errors in order picking and thus a bad reputation for the company.

Rethinking management processes to optimize inventory

To avoid overstocking, it is in the company's best interest to automate its storage system using an ERP (Enterprise Resource Planning) software. Teams will then be able to make the best decisions regarding their inventory management processes.

The importance of supply chain risk management

Supply chain risk management refers to all the means implemented by the company to ensure the management of threats likely to alter the continuity and profitability of the supply chain. This chain is increasingly complex to manage due to the multiplication of participants, flows and regulatory constraints.

The control of the supply chain management is therefore a major stake of the company strategy. An adapted and organized supply system ensures:

maximizied delivery performance (from supplier to distributor to customer);
the minimization of supply chain costs;
improved product availability;
reduced inventory and unnecessary costs;
improved operational efficiency;
better anticipation and responsiveness through order projections;
more efficient collaborations between suppliers and retailers, from warehouses to stores.

Companies must choose an inventory management model based on their industry and specific needs (ordering patterns, supplier relationships, replenishment intervals, etc.). Order-based replenishment (just-in-time, label or point-of-order) appears to be the most effective method for reducing overstock.

Setting up and sharing performance indicators

The use of performance indicators is essential for optimizing supply chain management. Among the most relevant indicators for reducing excess inventory are availability, service, stock rotation, occupancy and delivery times.

On the one hand, the calculation of the availability rate makes it possible to know which products are available for the customer according to the catalog offered by the company. It is not necessary to ensure 100% availability of all products: this would facilitate the creation of overstocks.

On the other hand, the service rate (associated with the analysis of delivery times) is a useful indicator to take stock of the number of orders delivered to stores among all the orders received at the warehouses. To avoid overstocking, short lead times should be emphasized in favor of a make-to-order replenishment method: inventory levels are increased only when needed.

Inventory turnover refers to the average number of days it takes for inventory to clear. The higher the number of days, the more inefficient and excessive the inventory is considered. The goal for companies is to find the right balance between product availability and inventory turnover.

Rationalization of the inventory policy

Optimizing inventory requires good organization from the start as well as the implementation of regular controls once the management method has been chosen.

In order to avoid any overstocking situation, the company can choose to reduce the amount of references by identifying the most profitable products. Indeed, the multitude of references does not guarantee the multiplication of sales. According to the 20-80 or 80-20 Pareto principle:

20% of references represent 80% of sales;
80% of the references represent 20% of sales;
80% of the references represent 20% of the stock.

By using the information obtained from the availability rate, the company can reduce the stocks of products with low sales and thus favour the maximum availability of the most demanded products. For products with relatively low sales, it can be interesting to centralize the references on a single stock level: the minimum stock level to meet the demand.

It can also reduce supplier delivery times by improving the accuracy of its sales forecast. These forecasts will allow the company to place orders quickly with a more local supplier at a lower cost, since it will not be necessary to order in large quantities to make transportation profitable.

Conducting promotional actions to reduce excess inventory

What is a promotion?

The purpose of product promotion is to increase sales of a product and therefore to clear remaining stocks through promotional processes implemented by the company. Product promotion can be carried out through a number of techniques such as price reductions (special offers, coupons, refunds, etc.), bonus sales (free products, gift wrapping, loyalty card system, etc.), trials and games (demonstrations, free samples, contests, lotteries).

The most commonly used method of clearing overstock is price reductions. Promotions can :

concern a permanent product or a temporary product;
target one or more customers;
be limited in quantity or duration;
be accompanied by advertising campaigns;
be recurring or new.

How to optimize your promotional processes?

First, the company must prepare its promotional process by establishing forecasts. To do this, it is essential to use the history of promotional operations. This history reveals the distribution of sales of promotional products during the last promotional action carried out. It reports on the cash register outflows before, during and after the last promotional operation, which makes it possible to better forecast inventory and order the right quantity of products. This will allow the company to avoid being confronted with stock-outs or residual stock.

The reflexive analysis of the promotion history also allows to measure the impact of the promotion on the customers. The factors of attractiveness and customer loyalty are then identified in order to optimize the next promotional operation.

Next, the company must manage the orders and supply. This logistical planning includes ordering products from the supplier according to the established forecasts, then checking the fluidity of the supply networks throughout the promotional period.

In addition, sales monitoring is imperative since the company must be able to readjust inventory if necessary based on the differences between forecasted and actual sales. The final step in any promotional operation is to analyze these variances to identify the elements that contributed to the success or failure of the operation.