Wednesday, August 13, 2008

Inventory prediction

by Jon Schreibfeder
The the greatest cause of dead inventory: leftover quantities of new stock products.
Any stock inventory that is not eventually sold to customers represents a loss to your company – a loss that must be paid for with net profits!

In a previous article, we explored how considering the effect a new item will have on existing inventory can help prevent the remaining stock of the existing products from becoming dead inventory. But what else can you do to prevent material from dying in your warehouse? Well, a good place to start is to follow a four-step plan whenever you're considering adding an item to stock:

1. Carefully consider each new investment in inventory.
2. Set sales goals for the new products.
3. Negotiate the return of unsold material with the vendor before the purchase order is signed.
4. Monitor progress towards achieving sales goals each month.
The Inventory Actuarial Table

Most distributors carefully consider each new purchase of capital equipment. Every truck, desk, and computer purchased must have the potential for increasing profitability of the company. After all, money doesn't grow on trees, and management knows that the limited funds available for new capital equipment must contribute to the company's profits. Unfortunately, new inventory items don't always receive the same careful consideration.

Why? Because introducing new inventory items is often an emotional decision. You have a "hunch" that something will sell, and you act on that hunch by investing in some of the product for stock. Unfortunately, often these hunches are wrong, and the result is dead inventory. Is there a better way than simply relying on hunches? We think so.

After working with many distributors, we've found there are some common characteristics of those new products that usually meet or exceed sales projections. There are also common attributes of new items that often become dead inventory. We call the result of our research the "Inventory Actuarial Table." In the insurance industry, actuarial tables assess the risk involved in insuring a car, a person's life, or something else for which an insurance policy is issued. Our actuarial table looks at the risk of a new stock item becoming dead inventory. Our inventory actuarial table is divided into three sections:

* Items presenting the least risk of becoming dead inventory.
* Items presenting a moderate risk of becoming dead inventory.
* Items presenting a substantial risk of becoming dead inventory.

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