Sunday, August 17, 2008

Substantial Risk

What type of new stock item is often at the greatest risk of becoming dead inventory? Products that your vendor suggests you carry! Your vendor's salesperson arrives at your office carrying an armload of glossy brochures. He shows you sales projections showing that a new item will take off and provide you with a wonderful opportunity to increase your profits or market share. Unfortunately, the new inventory may not be the panacea portrayed in the fancy graphs.

Recent surveys have shown that only a small fraction of customers who have said in a survey that they would buy a new item eventually purchase any of the item. This means that the vendor's survey (which was probably biased towards purchasing the product) probably does not accurately reflect the eventual actual sales of the item.
The best way to reduce the chance of vendor-recommended items becoming dead inventory is to negotiate the return, at no charge, of any unsold portion of the initial stock shipment of the product six or nine months after the date of receipt. If the vendor is unwilling to take back this unsold material, carefully reconsider stocking the product. Can you obtain a small quantity of the item from another source, even if you have to buy it at a higher cost? This "test quantity" will help you determine whether or not the new item will be a profitable addition to your inventory. Sure, the high cost will mean that you won't make a lot of money from the item during the test period. But losing money for a month or two on sales of an item is usually preferable to writing off a large unsold portion of the initial shipment.

When you add new items to inventory, you're investing part of your company's limited assets in the hope of gaining new sales and increasing profitability. Each new product addition should be made only after careful analysis, and the performance of every item should be reviewed on a regular basis.

1 comment:

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