In my previous two blog posts, I shared seven steps that a business can do to right-size inventory. You can read the first post here and the second post here. These ideas are mostly from my colleague Jane Lee’s write-up. In this final post, I will conclude this series with the last three steps. As Teddy Roosevelt said, “In any situation, the best thing you can do is the right thing; the next best thing you can do is the wrong thing; the worst thing you can do is nothing.” Following a full analysis of your inventory, it’s time to take action and use these 10 steps to right-size inventory. Doing nothing is NOT an option!

right-size inventory

Step 8: “First, Do No Harm.”

Take a leaf from the Hippocratic Oath: the easiest way to reduce excess inventory is to stop buying/making more of it and let sales bring the inventory down. Check your rebalanced list against production schedules/plans to ensure you’re not making or planning to make more of already over-stocked materials. Alter plans or schedules accordingly, and update future inventory projections.

Step 9: Evaluate alternate ways of moving/selling inventory.

You have now rebalanced the inventory within your warehouses, but you still may find excesses that cannot be brought down to reasonable levels within an acceptable time period. For these SKUs, consider whether there are other ways to move the material:

  • Can the excess material be converted into another which does have demand? Offer a promotion. Turn an inventory problem into a marketing opportunity by offering your best customers a slightly reduced rate if they take double their normal monthly amount. It is true that this will merely move demand from one month to another, but if the need to bring down working capital is great enough, this can still be a viable option.
  • Can an excess SKU be repackaged economically into a needed SKU (say, bags to boxes or vice versa)? Better yet, can customers be enticed to take their second choice (i.e., the original) package?
  • Can this material be substituted for another, even if the material to be substituted for sells for a somewhat higher price?
  • Can an opportunistic market be found for the excess material? Businesses sometimes remove their brand name from material, repackage it in plain brown bags, and give it a generic name for sales into a region far distant from their prime customers.
  • Is this a material (often a raw material) for which a swap can be arranged, with your competitors, for another material for which your supply is short, or for which your supply and your need are in different regions of the world?

All such possibilities must of course be measured for cost/benefit tradeoffs, including the message you may inadvertently be sending to the marketplace.

Nonetheless, knowing where your excesses are, provides options for what to do about them that the uninitiated cannot even examine.

Step 10: Make the Ultimate “Sacrifice.”

If, after analyzing all the possibilities above, you still have certain inventories vastly in excess, you may have to consider just writing them off. “Vastly in excess” will vary by business and by how critical it is that your working capital reaches a certain target by a certain time. Inventory cannot be managed in a vacuum, because writing off inventory means a hit on earnings. If it must be done, it is best done at the beginning of a quarter, so the earnings impact will be seen in time for the business to do what it thinks is appropriate to try to offset that loss. No one wants to scrap “good” inventory, so the most important lesson is to not allow yourself to get into this position again.

Analysis helps you take the actions with the greatest likelihood of success. As Zig Ziglar said, “You don’t have to be great to start, but you have to start to be great.” Being aware of, and understanding inventory problems, is not a solution, but it’s the place to start. In the next post, I will talk more specifically about concrete actions you can take to right-size inventory and how to deal with all of the obsolete, “dead” and excess inventory that has been identified by your analysis.

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  • Stuart Rosenberg

    Though I read T. Roosevelt’s biography forgot about that quote. Most people only remember: “Speak softly and carry a big stick”. But enough about TR. There are a number of other steps that if taken even prior to the ones mentioned it will help to right-size the inventory. These are a few of them:

    1. Don’t try to make the inventory or sales forecast pretty.
    2. Don’t forecast at a lower level and add up things to get to a higher forecast level.
    3. Don’t change the sales history.
    4. Don’t make assumptions about different or even similar products. Remember the old joke about ASSUME.

    Reduce the total cost of ordering and carrying inventory. The idea to reduce excess inventory is to pick items that are significant in dollars and in months-on-hand vs. sales orders or actual production orders.

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