Wednesday, August 13, 2008

The Three Types of Stocked Inventory

by Jon Schreibfeder

Whether you are a manufacturer, distributor, or retailer, each piece of each item in your stocked inventory can fall into one of three categories:

The Good: The inventory that you stock that provides a positive return on your investment – that is, you make money when you sell the product.

The Bad: Inventory that doesn't provide a return on your investment, but contributes to other profitable sales. For example, you might have to stock a line of slow-moving repair parts to support the sales of other, hopefully very profitable, products. "Bad" inventory is a necessary evil. It is not an investment, but an expense – that is, it is an expense of doing business.

The Ugly: Inventory that doesn't provide a return on your investment, and doesn't contribute to profitable sales. If you're in business to make money, there is no reason for this stuff to be in your warehouse. Refer to some of our other articles for advice on liquidating your inventory of this material.

Your first step in analyzing the profitability of your inventory investment is to place each item you stock into one of these three categories. But to do this, we must determine when a product contributes to corporate profitability – that is, what inventory falls into the "good" category.

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