Perhaps you can name the movie which contains the phrase, “I’m not dead yet! I think I’ll go for a walk!” While I think “Monty Python and the Holy Grail” is a really funny movie, my wife does not. But when it comes to inventory, the stuff that calls out as if to say, “I’m not dead yet, I think I’ll get sold” but is truly becoming dead and obsolete is no laughing matter for reasons which I detailed in my article, “The REAL Shocking Cost of Dead Inventory! ” So how can you prevent dead inventory?
If you buy-in to the fact that the true cost of dead inventory far exceeds the unit cost to purchase it, then you will realize that to prevent dead inventory you must ask, “How can I keep dead inventory from happening in the first place”? Avoid dead inventory like the plague! While this might seem obvious, there is more than meets the eye and it is easier said than done.
Don’t fall for the volume discount!
One of the quickest ways to acquire excess, obsolete and dead inventory is to buy more than you need. Suppliers provide volume discounts to encourage sales, but don’t buy more than you can turn quickly. Even an attractive discount percent can easily be lost if the item is not sold quickly or worse yet, at all! Better to pay slightly more and sell it than pay less but end up tossing or selling at a huge loss! Smaller and more frequent order quantities translates into both less inventory and less risk of that stock becoming dead and obsolete!
Don’t just guess!
Distributors must find ways to really understand their customer requirements and current trends in order to generate accurate sales forecasts. Don’t guess or trust a “hunch” but utilize solid data! The more data that is available to be analyzed, the more accurate the forecasted needs will be. Remember also, that a well-trained sales force tuned into customer needs can be a valuable source of intelligence, increasing the accuracy of a forecast by 10-20%.
Pareto your inventory
Across the board inventory cuts are possible, but at what cost? It is far better to “Pareto Your Inventory”. You are probably familiar with the Pareto principle (also known as the 80–20 rule) which states that roughly 80% of the effects come from 20% of the causes. When it comes to your inventory, could 80% of your profits be coming from 20% of your inventory items? Absolutely! So you need to learn which items are the most impactful to your business, and which are the least. Pareto your inventory using a tool like Cutwater which provides ABC analysis, by dividing items into three categories, A, B and C: A being the most valuable items, C being the least valuable ones based on several different criteria including profitability, number of turns, number of customers, and number of orders.
Use caution when adding new products to stock
One of the best ways to prevent dead inventory is to use caution when adding new products to stock. There is always pressure to respond to a new customer or a request from an existing account, and while service to these customers is important, you need a process to review the decision on how much of the new item to stock. Monitor the results on these new items to see if the original forecast is achieved. Consider eliminating something from stock before adding anything new. Try making an item non-stock and asking the customer to place the next order with enough time to allow you to bring the item in for them without stocking until you build up sufficient historic data to determine appropriate stock levels.
While so much rides on proactive planning and proper actions to stock the right amount at the right time for the right customers, there is an element of reaction as well. By reacting quickly to accurate customer and vendor intelligence, improving the procurement and inventory processes, and changing ineffective processes and procedures, you can succeed in avoiding some level of excess and surplus inventory.
React quickly, but have established stocking policies to prevent or discourage large returns of items, or of items that are obsolete, recalled, or non-returnable final sale items, and repackaged items. For example, if a customer cancels a large order, pay attention and have a plan and policy to follow. Quickly reassess your situation and determine if the item has already been ordered for that client or how the cancellation affects your future stock needs. The sooner you know, the more likely you may be able to make a return to your supplier rather than get stuck!
When providing special items for sale, follow vendor minimums as your required minimum if possible and encourage customers to accept the total quantity of special items. Or implement customer agreements, which require customers to purchase all on-hand quantities by a certain date.
In addition, the sooner that you recognize that you have a lost customer, the more quickly you can work to regain them and/or make a determination on the items you may have been stocking for them. A key is having a way of identifying lost customers quickly. This can help you prevent dead inventory that occurs from items that were stocked for those lost customers.
Assign an inventory watchdog to prevent dead inventory
Give someone full responsibility for watching out for your inventory with the goal to prevent dead inventory. They must know when and how to order, how much to order, understand lead times, have access to forecasts, how to receive items, how to track stock, and how to monitor sales and manage returns. While that person might not be popular when holding the inventory line, it will dramatically help your bottom line and prevent dead inventory! This is a challenging role, so help that person have the tools they need to shine. An excellent software tool can turn an ordinary inventory person into one of your most valuable assets!
So how do you prevent dead inventory from happening in the first place” What ways have I missed? Especially if you are your company’s inventory watchdog, I’d like to hear from you!