How to Deal with Excess Inventory
Having too much non-moving inventory is one of the biggest problems experienced by both large and small businesses. Purchasing too much and slow moving inventory will negatively impact your cash flows and profits. You could run out of cash to buy profitable inventory. Excess inventory consumes administrative and physical resources. Non-moving inventory also decreases in value as it sits idle in your warehouse. This article discusses some of the issues associated with excess inventory and its solutions
What to do with excess inventory
Excess inventory needs to be avoided in order to free up cash that could be invested in more cash generating product lines. One of the biggest problems many small businesses experience is running out of cash. Excess and slow moving inventory negatively impacts your cash flows and profits. It consumes administrative and physical resources, and continuously decreases in value as it sits idle in your warehouse.
Many inventory problems are the result of having too much inventory or simply the wrong type of inventory. These problems are typically the result of not accurately tracking current demand and not accurately forecasting future demand. If your staff do not track inventory accurately, you could end up running out of highly saleable merchandize and fill up the store with non-moving or excess items.
If your forecast for future demand is too high, you end up tying up too much of your cash flow into unneeded inventory. On the other hand, if you underestimate the sales volume and an item turns out to be a best seller, you could end up over-ordering to catch up with the demand.
Avoiding excess inventory is especially important for businesses that offer seasonal products, which include home accessories, clothing and holiday or gift items. Since these types of products have a shorter shelf life, they are typically hard to sell once they are no longer seasonable or fashionable.
Non-moving stocks simply take up space, take up people’s time, tie up cash and resources without giving a return. In today’s economic climate, companies need to maintain their inventory as LEAN as possible.
What kind of business do you have?
The amount of inventory you need to have depends on many factors including the type of business you are in, the length of your supply chain, your product lead times and of course the demand for the products.
The Surplus Store
In this business model, you buy cheap, hold the inventory for a long time and then sell at a great profit. I knew an importer who specialized in closeouts. Closeouts are products which have been marked down heavily and are available from the manufacturer’s warehouses if you buy by the container load. Yes, this importer was able to retail at greatly discounted prices and still make a huge profit (making business almost impossible for his competitors) but, as an unintended consequence, his retail stores developed a reputation for selling old and soon-to-expire stock.
If you are in the surplus store business, your big profit margins can more than make up for the additional holding cost you incur. Are you in the surplus store business?
The Retail Store Model
On the other hand, if you are a typical retail store, where you need to react more closely to fads and fashion, the surplus store model will not work for you.
In this business model, you want to keep slow moving inventory at the minimum possible and have the cash to keep your inventory current. Too much slow moving inventory will result in cash flow problems and loss of selling space.
You will want to develop a system that tracks your inventory closely so that you can determine which products really make a profit for you and which ones have begun to slow down and need to be removed from you store.
Solutions to Excess Inventory
Just get rid of it
- Mark Down. Run a special sale. Many of the larger stores go through regular “inventory sales” promotions. Slow moving stocks simply do not generate the revenue to cover the cost of the space they consume and you are better off knocking down the price to move it. Be careful not to run the promos too long, though. Your customers could get used to them and simply wait for you to go on sale and ignore your other merchandize. Too many deep-discount sales could also hurt your store’s image, especially if you are a higher-end retailer.
- Bundle or Cross-Merchandize. Bundle your slow moving products with fast movers at a discounted price. You might pick up some impulse sales, as some customers will value the discount they are gaining by making the purchase.
- Move it to a different location. If you have a multi-store operation. Slow moving stocks might be better sellers at another location. The cost of moving the stock could well be less than just having it sit in the warehouse.
- Sell it to a surplus store operation. There are now many operations that specialize in buying entire lines of non-moving or even obsolete merchandize. These are usually auction houses that can convert your junk into cash.
- Donate it to charity. When all else fails, why not donate it to charity. Perhaps your items were really intended for some other person who could really use the help. You could also generate community goodwill for your business.
Work Hard to Prevent Excess Inventory
We’ve all heard the saying “an ounce of prevention is worth a pound of cure.” Prevention is the best solution to preventing excess inventory. Your staff will need the following skill sets:
- Inventory Management – using the proper tools and techniques to analyze which items to purchase at what price and quantity and time in order to make a profit. Determine the lead times time and the optimal safety stock.
- Inventory Control – using the proper tools and techniques to accurately count and manage the items after you have purchased them.
- Forecasting – Determining the ideal inventory level based on historical sales patterns and on forecasting future sales.
- Purchasing – using the proper tools and techniques to accurately compute and compare suppliers to determine who gives you lowest total cost ownership.
Non-moving stocks simply take up space, take up people’s time, tie up cash and resources without giving a return. In today’s economic climate, companies need to maintain their inventory as LEAN as possible. The answer lies is in preventing excess inventory. The power to do this is in the hands of your staff who analyze your inventory. With the proper tools and applying the right techniques, they can prevent or at least reduce the amount of excess inventory you have in you warehouse.
About the Author
Raffy Pefianco has a wide experience in retail, distribution and manufacturing management having run or consulted for chains of specialty stores for many years. He is currently focused on providing training and consulting to several of the largest companies in the Philippines and regularly runs public and in-house seminars on supply chain management. He is a Master Project Manager and a Fellow of the American Academy of Project Management. Please click [Background of Raffy Pefianco] to read more about him.
People who read this post also read:
- Effective Inventory Planning and Management
- Warehouse and Inventory Techniques for Retail Operations
- Effective Purchasing Skills
- Forecasting Training for Sales and Inventory
RMP Consultancy conducts seminars on Warehouse and Inventory Management. We have conducted warehouse operations and management training for many of the largest construction companies in the Philippines. Our training courses focus on teaching the warehouse staff the best practices in keeping track of the inventory in the warehouse using the limited space and resources available to a temporary warehouse.Get your staff trained. Click on the links below to find out more.
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