Wednesday, August 13, 2008

Effective Inventory Management

by Jon Schreibfeder
Today, most companies that distribute products are adding more new products to inventory than every before. Not only do these new items allow distributors to meet their customers changing needs, they also present the opportunity to penetrate new markets. Adding new products often fills management's brains with thoughts of higher sales and profits. But you must have more than stars in your eyes and thoughts of glory when you decide to expand your product offerings.
There are two strategies for introducing new products, an "immediate" replacement and a "partial" replacement. If not handled correctly, either strategy can result in dead or excess inventory of existing products. Let's examine why this happens and what you can do to prevent it.Immediate Replacement
In an immediate replacement, a new item replaces an existing product. That is, you do not plan to sell the existing product after the new product is introduced. Most distributors know enough to discontinue the old product and prevent their buyers from replenishing its stock. But they usually don't pay much attention to the remaining stock of the old item.

You face a problem if any of the old product remains in inventory after you begin selling the new item. Who wants to buy the old item once the new product is available? Most likely, your remaining stock of the old item will remain on the shelf and gather dust. How can you prevent this from happening?

Try to sell out your entire stock of the old item before introducing the new product. Yes, that means rotating your stock. This is common sense, but some distributors have problems convincing their warehouse people to pull the oldest stock first. Maybe it's because the new boxes are "prettier" than the old ones. If you continually fight this battle, consider transferring your company's entire stock of the old product to one or more specific branches. These branches will not receive the new product until their stock of the old item is depleted. Other locations will be stocked with the new product. This way, your employees have the opportunity to sell the old product or the new product, not both.

But what if your customers know that the new product is available? They may insist on receiving the new item. What do you do with your existing inventory of the old product? Follow the example of computer retailers and discount it! Offer your customers a special price for the material you're trying to clear out of stock. And make it a substantial discount! You want to convince your customers that they are getting a "deal." Don't be tempted to offer a small reduction at first, and if necessary follow it up with a more substantial discount. As time passes, the old item will probably be worth less to your customers, and will therefore be harder to sell. You may not have the opportunity to sell the old item after a few months (or even weeks). The result: you're stuck with a quantity of the old product that has become dead inventory! It's almost always in your best interest to liquidate the stock of the old product as soon as possible.

Partial Replacement
In a partial replacement, a new product will take some but not all of the sales away from an existing product. The existing item is not discontinued, but often contributes to excess inventory. Why does this happen? Let's look at an example:

ABC Distributors is introducing a new item, the model #A234 widget, that can be used in about half of the applications of an existing product, the model #A100 widget. The model #A234 is more energy efficient, and is less expensive. It's not surprising that the new product will be used wherever possible. The result: it will capture about half of the previous demand for model #A100.

Here's the potential problem: Most distributors base replenishment (at least in part) on past sales or demand history. What will happen if the buyer replenishes model #A100 based on its past sales, without considering the effect the new product will have on future sales? The distributor will order twice as much of the model #A100 as is needed. In other words, ABC Distributors will be ordering excess inventory of the model #A100 from the vendor!

It is imperative that whenever a new product is introduced that will partially replace the sales of an existing product, the sales or demand history of the existing product must be adjusted to reflect the projected sales of the new item.

More new items are being introduced to the market than ever before. Distributors must spread the money they have available to invest in inventory over a greater number of products. Carefully consider the effect new product sales will have on existing products. You cannot afford to waste money on dead and slow moving inventory!

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