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.

Dead inventory - moderate risks

There is a greater chance that these new stock items will eventually become dead inventory. Salesperson and customer "suggestions" represent the most common type of moderate risk item.
Notice that sales spike shortly after the item is introduced to inventory. This is probably due to the fact that salespeople are featuring this product in their sales calls. As time goes on, salespeople don't talk about this product as often. In fact, their attention may be centered on more recent additions to inventory! They forget to remind the customers who asked that the product be stocked why they aren't buying more of the item.

To reduce the chance of these items becoming dead inventory, you must continually remind the salespeople of the sales and current stock position of all new stock items. Print and distribute a report containing the following new product information to each salesperson each week, or at a minimum each month, until the product has been in inventory for five to six months:

* Product number and description.
* Current month sales (in units).
* Sales projection for the current month (provided by the salesperson before the item was added to inventory).
* Total sales (in units) of the item to date.
* Total sales projection to date (provided by the salesperson before the item was added to inventory).
* Current on-hand quantity.
* Manually set minimum stock level of the item.
* Manually set maximum stock level of the item.
* Name of salesperson who requested that the item be stocked.
* Reason why the item was added to stock.