What Is Overstocking?: The Ultimate Guide

By Team TranZact | Published on Feb 21, 2023

Overstocking your inventory will not only add to storage costs but also lead you to lose a lot of money in the long run. Whether you run an e-commerce business, are a manufacturer, or are a wholesaler, you need to ensure that inventory supply is just right. If the inventory is overly stocked, you may see a lot of products getting expired if those are not sold anytime soon.

In this article, we have discussed the causes of overstocking, how to prevent overstocking as well as the difference between overstocking and understocking.

TranZact - Best Inventory Management Software

What Is Overstocking?

Overstocking means having excessive or surplus stock, which means more stock than what is required by the business. When there is excessive stock in the store or in the warehouse, it hits profitability directly. Overstocking of inventory is a very common problem that businesses face.

Many businesses fail as they fail to plan replenishment of the inventory and thus end up stuffing the inventory. Overstocking your inventory is also very expensive. The best way of stocking or restocking the inventory is by getting goods that have the highest-selling stock-keeping units (SKUs). It will keep things simple and easy and help you improve your business.

When inventory management is poor, inventory flow is not handled well which results in either excessive stock or understock scenarios. Both, lead to a loss of revenue.

What Are the Causes of Overstocking?

Let's see what are the possible causes of overstocking problems in business.

Worrying about inventory stockouts

One of the main reasons for overstocking inventory is the fear of stockouts. No business wants to run out of stock, as it can result in a loss of customers and ultimately, revenue. However, overstocking is not the solution to this problem. Instead, businesses can use technology and forecasting tools to monitor their inventory levels and make informed decisions about when to reorder.

Poor inventory management

Proper inventory management is crucial to maintain a functional and well-stocked inventory. Human error can lead to incorrect tracking of goods, resulting in duplicate orders and overstocking. To avoid this, businesses should implement an efficient inventory management system that keeps track of stock levels and locations. This will help prevent overstocking and ensure that the inventory is always up to date.

Seasonal demand

Some products have seasonal demand, which can be difficult to predict. However, businesses can use historical sales data and market trends to forecast demand and adjust inventory levels accordingly. Additionally, businesses can promote their brand and offer seasonal discounts to increase sales during the high-demand season.

Poor demand forecasting

Having insight into future demand is critical for effective inventory management. Without proper forecasting, businesses may order too much inventory, resulting in overstocking. To avoid this, businesses can use forecasting tools to predict future demand based on past sales and market trends. This will help ensure that inventory levels are always optimized.

How Can Overstocking Inventory Be Prevented?

As an SME manufacturing business owner, preventing overstocking is crucial to maintain a healthy inventory and maximizing profits. Here are some tips to help you avoid overstocking:

Set inventory levels

Setting both minimum and maximum inventory levels is essential. The minimum level will help you avoid stockouts, while the maximum level will prevent overstocking. By tracking inventory levels regularly, you can ensure that stock levels remain within the desired range.

Practice inventory management skills

Effective inventory management involves tracking stock levels, sales, and customer demand. By analyzing this data regularly, you can make informed decisions about inventory replenishment and avoid overstocking. Utilizing popular inventory management practices can also help ensure accurate tracking and optimization of inventory levels.

Use inventory management software

Using inventory management software can make the task of tracking and managing inventory more efficient and accurate. Such software can help you track stock levels, sales, and demand, and generate reports to inform decision-making. You can opt for the software that best fits your business needs.

Overstocking vs Understocking: What Are the Differences?

Overstocking and understocking are two different situations in inventory management that have their own advantages and disadvantages.

Overstocking is when a company has too much inventory on hand, meaning they have more products than they can sell within a reasonable time frame. This can lead to increased storage costs, decreased cash flow, and higher risks of product obsolescence or expiration. However, having extra inventory on hand can also help to ensure that products are always available for customers, and can allow for better bargaining power with suppliers.

On the other hand, understocking is when a company has too little inventory on hand, meaning they don't have enough products to meet customer demand. This can lead to lost sales, unhappy customers, and decreased revenue. However, having less inventory can also result in lower storage costs and better cash flow.

Finding the right balance between overstocking and understocking is key to achieving optimal inventory management. This is why businesses typically use forecasting and inventory management tools to help them predict demand and adjust their inventory levels accordingly.

How to Avoid Overstocking?

Properly managing inventory is crucial for avoiding overstocking and increasing profits. There are several ways to ensure that you don't overstock your inventory, and one of the best is the use of inventory management software. Below are some effective ways to prevent overstocking:

Accurate demand forecasting

Inventory management software can easily analyze sales history and make accurate demand forecasts. By knowing when there is a need to restock inventory, the software helps avoid overstocking. Additionally, the software can provide detailed reports that aid in understanding performance and costs, allowing for informed decisions on how much inventory is needed for the business.

Regular inventory audits

Regular inventory audits help to ensure that the company's finances and inventory of goods match and that there is no discrepancy. By performing these audits frequently, overstocking can be avoided, and informed decisions can be made.

Keep a close eye on inventory levels

Manually keeping track of inventory levels can be difficult, but inventory management software makes it easier and more accurate. With the software, you can quickly see the status of different inventories and know which SKUs are low on stock. By planning and ordering accordingly, overstocking can be prevented.

Set inventory levels

It is important to set maximum and minimum inventory levels based on factors such as demand, sales, and seasonality. Inventory management software makes it easy to set these levels, and it sends alerts to keep you informed at all times. Business intelligence features allow for a clear picture of inventory levels, making it possible to automate the ordering process.

Track inventory across multiple locations

If your business has multiple locations, inventory management software can track inventory details of all the locations from one centralized system. This helps ensure that inventory levels at all locations are just right and that there is no over or understocking. If there is excess inventory at one location, it can be redistributed as needed.

Ensure Seamless Inventory Management With TranZact

Using TranZact for inventory management can help streamline your business operations and prevent overstocking. With its cloud-based solution, TranZact offers intelligent inventory analysis and inputs for demand forecasting to ensure that your inventory is always optimized.

In addition to inventory management, TranZact also offers features for sales, purchases, and production management. You can simplify your entire supply chain by using TranZact as your all-in-one solution!

FAQs on Overstocking

1. What is overstocking?

Overstocking refers to the situation where a business holds an excessive amount of inventory or stock of a particular product or raw material, beyond what is required to meet current or anticipated demand.

2. What are the consequences of overstocking?

Overstocking can lead to a range of negative consequences for a business, including tying up valuable capital in excess inventory, increasing storage and handling costs, and risking stock obsolescence and spoilage. Overstocking can also reduce the overall efficiency of inventory operations and impact a company's ability to respond quickly to changes in demand.

3. How can a business prevent overstocking?

To prevent overstocking, a business can implement effective inventory management practices, such as regularly reviewing inventory levels and demand forecasts, establishing minimum and maximum stock levels, and using inventory tracking and analysis tools and software.

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TranZact is a team of IIT & IIM graduates who have developed a GST compliant, cloud-based, inventory management software for SME manufacturers. It digitizes your entire business operations, right from customer inquiry to dispatch. This also streamlines your Inventory, Purchase, Sales & Quotation management processes in a hassle-free user-friendly manner. The software is free to signup and gets implemented within a week.