Wednesday, August 13, 2008

Dead and slow-moving inventory

by Jon Schreibfeder
Dead Inventory

These items have had no sales or transfers during the previous 12 months. As we said before, there are two reasons to maintain stock of these products:
* They are critical repair parts
* They are new stock items that a customer has committed to buy, or a salesman has committed to sell

If an item does not meet one of these criteria, you should probably discontinue it and dispose of your current stock.
Slow-Moving Inventory
Slow-moving items are similar to dead stock items, but they have experienced some (but not much) customer demand during the past 12 months. These items may also be candidates for being discontinued. Carefully review each of these items and ask yourself, or your sales department, these questions:

* Do we expect customer demand for this product to continue or increase during the next 12 months?
* Do our customers expect us to always have the item on the shelf and available for immediate delivery?
* Is there another source (an alternate vendor, company branch, or even a competitor) for this item that will allow us to meet our customers' expectations without maintaining warehouse inventory?
* Is the product very inexpensive, and therefore does not require a significant investment in inventory?

You may receive the response, "Go through all of these items? You must be kidding! There are just too many of them!"

If someone says this, ask them if they were to go to Las Vegas and win $1,000 in quarters from a slot machine, would they try to collect all 4,000 coins from the floor? Many companies agonize over the purchase of a $1,000 computer, but will not spend the time necessary to analyze dead stock and slow-moving inventory. This is strange, illogical thinking. The same asset (i.e. available cash) that is used to purchase new goods is literally tied up in dust-covered stuff in your warehouse. If you stock more items than you can keep track of, you're stocking too many products... or you need more help in inventory management!
Budget for Dead Stock and Slow-Moving Inventory
It's tempting to continue maintaining all of your dead stock and slow-moving items in stock. There is a "warm and fuzzy" feeling associated with knowing you have, in stock, anything any of your customers could possibly want. But can you afford this feeling? Remember that maintaining inventory that doesn't sell is a cost of doing business. We need to set up a budget for this expense.

The first step in calculating this budget is to calculate the average value of all of the dead stock and slow-moving inventory you plan to continue to maintain in each of your company's warehouses.

Consider the value of dead and slow-moving inventory to be equal to the current available quantity of each item times its average cost. If you don't have the average cost for an item, you may substitute the product's replacement cost.

Is this a conservative measurement? Yes. After all, dead stock and slow-moving items are sold on occasion. So the available quantity of at least some of these items will decrease during the year. You may even sell an entire vendor package! If you want to calculate the actual average value of the inventory of each of these items, fine. But most distributors only have the time and resources to perform this analysis based on the current inventory value.

Let's consider an item that you feel is a "critical repair part" and should always be on the shelf, available for immediate delivery. The cost of the product is $15.00. At first glance, $15.00 does not seem to be a lot of money to maintain an item in inventory, especially an item that has been designated as a "critical repair part." But if you consider the hundreds or thousands of slow-moving or dead stock items stocked by many distributors, as the late Senator Everett Dirksen once said, "a million here, a million there, pretty soon you're talking about real money."

Most distributors should limit the total amount of money they have tied up in non-moving inventory (i.e. dead stock) to no more than 10-15% of their total inventory investment. And, slow-moving inventory usually should not exceed an additional 15% to 20% of total inventory. If your investment in dead stock and slow-moving items exceeds the budget amount, you have two choices:

* Go back and discontinue more items.
* Reduce your target inventory turns so that the value of dead stock and slow-moving inventory you plan to maintain equals 35%, or more, of your target inventory investment. But, make sure everyone involved in the decision of which products to stock is aware of the negative effect this action will have on corporate profits.

1 comment:

Jamie said...

It's important to keep track of your inventory to see whether some of the items in stock are either dead or slow-moving. An inventory system software could be used to monitor the items that go in and out of your warehouse stock. Having a software like that could save you the hassle of having to check all items manually. When you use inventory software programs, the time you'll spend in checking will be saved, and you'll be able to calculate the average value of the dead and slow-moving inventory easily.