Wednesday, August 13, 2008

Inventory Liquidation

Most firms worry about liquidating dead stock once a year – that is, after they complete their physical inventory. The owner looks at the inventory valuation report. He clutches his chest as he views the list of type "X" items (i.e. stuff that’s in your warehouse that you wish weren’t there). He makes one of several pronouncements:

"We have too much stuff in our warehouse. Stop buying inventory." Great! Most of what is in your warehouse is dead or slow moving. The boss’ new policy prevents you from replenishing the inventory of the products that do sell on a regular basis. The result is all too common: You have a warehouse full of material, but you don’t have the products necessary to meet your customers’ needs.

"We’re going to get rid of this stuff by next year." In many companies, this pronouncement is as predictable as the ball dropping on New Year’s Eve in New York City’s Times Square. Unfortunately, it is forgotten five days after the end of the fiscal year. And twelve months later, the warehouse is bulging with even more inventory.

"We need a new computer system (or new people) to straighten out this inventory mess." Without implementing the business policies necessary for effective inventory management, no person or computer system can bring a muddled inventory under control.

Inventory liquidation must be an ongoing process that must be coordinated by a specific individual in your organization. We call this person the "dead stock coordinator." After receiving the list of discontinued products and items with excess inventory, this person must determine the best method of liquidation – that is, the method which returns the most value to the company. They must go through the list, trying each method of liquidation in order of desirability, until they dispose of the material. But remember that dead inventory disposal isn’t a one-person job. Every department must participate in the effort under the coordinator’s direction. The dead stock coordinator organizes everyone’s activities and makes sure that the effort to reduce dead stock and excess inventory continues throughout the year.

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