How Overstocking and Stockouts Are Killing Your Working Capital
It was a Monday morning when Rahul, a plant manager realized something was terribly wrong. A few months back their mid-sized well-known automotive parts manufacturing unit was riding high on demand. Hence the evergreen human problem of over-confidence kicked in & their CFO ordered excessive raw materials to avoid any production delays. Fast forward to six months, market demand shifted unexpectedly, and the company was left sitting on $20 million worth of unused inventory. Meanwhile, another division faced a critical stockout—missing a key component delayed shipments, leading to penalties and lost contracts. The result? A 30% drop in working capital efficiency, squeezed cash flow, and overworking hours to rebalance inventory.
The Double Whammy: Overstocking vs. Stockouts
Overstocking- The heavy Burden
Overstocking is like storing cheques with expiry dates—technically, it’s money, but by the time you use it, it’s worthless. It may seem like a safe bet, but it’s a silent killer of working capital.
- Excess Inventory = Frozen Cash. Every rupee tied up in surplus stock is a rupee unavailable for new investments, payroll, or urgent bills or debt payments. Overstocking incurs higher storage, handling, insurance and obsolescence expenses, all of which erode profit margins and liquidity.
- Rising costs. Warehousing, insurance, even spoilage or depreciation all dry up the margins. Excess goods increase logistics management headaches (finding space, tracking lots, managing returns) and can force markdowns or write-offs.
- Obsolescence Risk: Perishable or tech-based inventory loses value over time.
Industry where product life-cycles are short. The inventory stocked up for last year’s trending model might find today’s market wants something new – leaving them with unwanted stock and no cash.
A study by Delloite has already revealed that that excess inventory accounts for nearly 25% of working capital inefficiencies in mid-sized manufacturers.An another 2022 report by McKinsey highlights that manufacturers lose up to 10% of profits due to poor inventory management.
Stockouts- The Lighter Curse
There is a famous Hindi proverb which goes like “Apne per pe kulhadi maarna” i.e. to hit onself in the foot, & stockouts best exemplify this proverb. Stockouts have much deeper impact on your working capital & reduce its efficiency.
- Lost Revenue. Every time a buyer can’t get a needed component on time, potential sales slip away. A Harvard Business Review study found that 40% of customers switch brands after just one stockout experience.
- Rush costs. To compensate, operations often pay premium prices: emergency production runs, expedited freight, overtime for staff. These surcharges further eat into margins.
A PwC analysis of a consumer goods company showed that stockouts led to a 5% revenue loss annually—equivalent to millions in missed opportunities.
The Root Cause of the imbalanced act of Overstocking & Stockouts
- Poor Demand Forecasting
- Relying on gut feeling instead of data-driven insights.
- Ignoring seasonality and market trends.
- Inefficient Supplier Management
- Unreliable lead times force over-ordering “just in case.”
- Lack of Real-Time Visibility
- Manual tracking leads to errors and delays.
Balancing the Seesaw – Anti-dote to your working capital drain
This balancing act can be achieved by implementing the the right mix of technology & strategy & letting both talk to each other & not just remain in silos.
- Data Driven Demand Forecasting & Safety Stock: Using AI enabled data-driven forecasting to predict key metrics like sales spikes or raw-material needs. By anticipating orders, factories can order materials in time, reducing both stockouts and the need for large safety stock buffers.
- Adopting Just-in-Time (JIT) Practices: Tailor production schedules and supplier deliveries to match demand closely.
- Inventory Segmentation: Classify SKUs by turnover, value, and criticality. Fast-moving or high-value items get tighter control; slow movers are order-on-demand. This avoids blanket overstocking.
- Leverage Technology through integrated ERP Solutions- Modern ERPs, customized for manufacturing, centralize inventory, production schedules, procurement, and finance. ACESnWS builds custom ERP solutions that link these silos. ACESnWS specializes in custom ERP and AI/ML solutions for manufacturers – for example, AI-powered demand forecasting models that align purchases with need. This can drastically reduce the guesswork.
Overstocking & Stockouts are the two sides of the same coin, the coin being Poor Inventory Management. Both drain working capital in multiple ways, reduce profitability & customer trust. But the solution is not some distant dream. It lies in Data-driven forecasting through ERP Solutions & AI-ML Tech, Smart replenishment strategies &
Real-time inventory tracking. For instance, ACESnWS provides AI-powered inventory forecasting solutions and robust ERP customizations that give supply chain visibility to even complex operations. These innovations help factories answer critical questions – What should I stock right now? and How can I meet demand without overbuying? – ensuring cash isn’t stuck idle or needs to be borrowed.
Contact ACESnWS today for a free inventory health assessment & to explore how custom ERP and AI solutions can balance your stock levels, enhance forecasting, and ultimately unlock cash trapped in your supply chain. With the right technology partner, you can turn inventory headaches into working-capital wins.
