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!
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:
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.