Wednesday, August 13, 2008

Liquidating Non-Moving Inventory

by Jon Schreibfeder
Inventory slated for liquidation can be compared to shares of stock you own in a company headed for bankruptcy. When you first bought the stock, you thought it was a good investment. But market conditions, or other factors, changed the situation. The longer you hold onto the security, the less it is worth. Selling the shares of stock for less money than you paid for them may be your best alternative. At least you’ll get some cash back from your investment.

While it does not produce the most desirable result, liquidating dead inventory sure beats losing all of your money. Sure it’s painful. It hurts so much that some distributors can’t bring themselves to do it. They are emotionally tied to their products. They may even believe in fairy tales, including the one about how, one day, some desperate customer will walk in and buy all of the dust-covered stuff in the warehouse. The occasional sale of a piece of dead inventory perpetuates many sales managers’ belief in this myth. But these infrequent sales cannot come close to economically justifying maintaining all of the products that should be removed.

In the movie Wall Street, Michael Douglas’ character, Gordon Gecko, said, "Don’t get emotional about stock, it clouds your judgment." He was referring to securities. The same advice applies to the material in your warehouse. Don’t get emotional about stocked inventory!!!

The goal of inventory liquidation is to dispose of unwanted inventory at the best possible price or the least possible expense. Here are some ways you can accomplish this task. They’re presented in the general order of desirability:

Transfer the excess stock to another company location where the inventory is needed. A product may be "dead" in one branch, but still active in another location. Why spend money to buy more of the product when you’ve already invested in inventory that is gathering dust at another company location? This option is particularly attractive if the cost of transporting the product between branches is a small fraction of the value of the item.

Many distributors have instituted ongoing programs to move slow-moving inventory to locations where it is in greater demand. This process is called inventory balancing. "C" and "D" ranked products in one branch are candidates to be transferred to other branches where they are ranked as "A" items. Multi-branch distributors practicing successful inventory management balance their inventory between warehouses at least four times a year.

Reduce the price to "move" the excess inventory. Department stores do it, why can’t you?

Offer your salespeople a monetary incentive to sell the product. This works especially well when a customer can choose between several products that will meet his or her needs. Sometimes it is almost miraculous how fast inventory can move when salespeople are provided with the proper incentive.

Advertise the availability of this material to other suppliers. Consider placing ads in industry publications listing the products you’re planning to liquidate. There are also Internet World Wide Web sites (such as that maintain lists of available surplus stock.

Industry Mart’s Larry Wise gives a good example of the value the Internet in inventory reduction. "I spoke to six industrial distributors recently. They we were all gearing up for a major reduction of excess inventory, and all of them said a major component in their reduction plans was to offer their lists of excess to the traditional surplus dealers. These dealers were buying inventory for pennies on the dollar and marking the products up 1000% to 3000%! Boy were those distributors about to get ’gypped’!" These distributors didn’t realize that at least some of their surplus inventory had value in someone’s eyes. And, the traditional surplus dealers may get rich because the distributors don’t realize that there’s still a strong market for some of their surplus stock.

Internet sites that specialize in surplus material allow you to sell specific items in your excess stock at an amount close to your actual cost. And selling even part of your excess stock at cost is a lot better than selling the entire batch at 10 cents on the dollar!

Brainstorm and get creative. One distributor lost a customer contract to supply a certain, custom-made product. When the contract was canceled, there was a four-month supply of the item on the distributor’s shelf. And worse, the vendor wouldn’t accept a return of the material. The stock of this item could be accurately termed "future dead inventory." Instead of taking the typical non-action of ignoring the situation, one salesman took assertive action. He called his competitor who won the contract, and sold his entire inventory of the product at 80% of cost. As there was no other use for the material, this was truly "found" money!

Substitute the product for a less-expensive item. Suppose you sell water heaters. Your manufacturer replaced his model A345 with the model A365, which offers easier access to the heating element. You have three pieces of this discontinued 40-gallon heater in stock. Naturally, contractors ordering a 40-gallon heater want the new model. But, when a customer orders a 20-gallon heater, why not offer them one of the discontinued 40-gallon heaters at the price of a 20-gallon unit?

Donate the material to a non-profit organization. Can a school, church, or charity use some of your dead or slow-moving inventory? This alternative is especially attractive for sub-chapter "C" corporations. These companies can take a deduction of up to twice the cost of the inventory. Talk to your accountant or tax advisor for details and restrictions concerning material donations.

Throw it away. The least agreeable alternative. But, at least your freeing up some shelf space in your warehouse, getting rid of an eyesore, and getting some value by being able to write off the cost of the material. But be sure you have tried all of the other possibilities before you implement this last resort.

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