STAFDA Inventory Consultant Jon Schreibfeder
Effectively Introducing New Products
Replace emotion with analysis when adding new products.
Most companies carefully consider each new purchase of capital equipment. Every truck, desk, and computer purchased must have the potential for increasing profitability. 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.
The chances of a new item turning into dead stock are very high if one person makes a spur of the moment judgment to introduce a new product. To encourage careful thought in stocking decisions we suggest you utilize a new product questionnaire. Here is a sample questionnaire along with some advice for analyzing the responses. The questions are in bold letters and the commentary is in italics.
This questionnaire must be completely filled out by the
salesperson requesting the item be added to stock inventory. If a salesperson does not have the information necessary to fill out the questionnaire, he or she has not performed the analysis necessary to properly determine the market potential of the new product.
Salesperson requesting the new product: What is this salesperson’s track record for introducing successful new products? Speculating on what products might sell (especially products requiring a significant investment) is an activity that should be reserved for
salespeople with a history of successful product introduction.
Location: What company branch(s) or warehouse(s) should initially stock the product? Can it be test marketed in one location?
Customer or Potential Customers: If the product is only going to be used by one customer, the risk of the product dying in inventory is much higher than if there are multiple potential customers. If the product is only going to be bought by one customer, be sure that customer has met his previous commitments for purchasing special order products. If he or she has not, consider asking for a written commitment to purchase the initial purchase quantity you must buy from the supplier.
Reason for the product to be added to inventory: That is, how will the customer(s) use the product?
- In an existing application or process?
- If the product was previously purchased from another supplier, why did the customer decide to switch vendors? Be sure to have your accounts receivable department perform a credit check with the previous supplier to ensure that the customer is not on credit hold with them.
- If the product is replacing another stock product, how can you liquidate the remaining stock of the old item? Has your purchasing department been notified to discontinue or modify the purchasing parameters of the old product?
- In a new application or process? What is the customer’s potential market or usage for the new product? The smaller his/her potential market or size of the application, the greater the chance the customer will not buy the new product on a regular basis.
At what rate will the new product be used or consumed? At least six months demand
projections should be provided.
- What is the source of this prediction?
- How reliable has this source been in the past?
How will sales or usage of this new product affect the usage of other existing stock products? Can an existing product be replaced by this item and discontinued? Should the stock of another be reduced because this new item will assume some of its sales or usage?
How much product do you have to purchase in the initial order? It is usually not a good idea to purchase more than a projected two-month supply of any new stock item. Because the forecast demand quantities of new stock items are historically inaccurate, there should be a substantial difference in cost to purchase a larger quantity of the product.
Can a smaller initial quantity be purchased, even at a higher unit cost? It may be better to lose money on a small quantity of a new product (i.e. test market) than obtain a low unit cost and end up with a large amount of dead inventory. If the small initial quantity sells within a reasonable amount of time, it is probably safe to issue a purchase order for a quantity that will provide the cost necessary to achieve the target gross or adjusted margin.
What is the liquidation cost/value of this material per unit? If there is a cost of disposal for expired quantities of this product, the initial purchase should be limited to the smallest practical quantity for test marketing purposes.
It is important to continually remind the salespeople of the sales and current available quantity of all new stock items. Print and distribute a report containing the following
new product information to each salesperson at a weekly sales meeting until the initial purchase quantity has been sold or used:
- 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
Saving face, or not
By continually reminding salespeople of the existence and sales volume of new stock items, we hope they will continue to enthusiastically promote these products. Strangely enough we’ve experienced the best results when the report is reviewed in a sales meeting.
Apparently many salespeople will offer excuses to a purchasing agent or company management as to why a product hasn’t sold. But their competitive nature makes them reluctant to make these same excuses to their fellow salespeople. They’re
embarrassed to admit they can’t sell a product they requested be stocked. As a result, they will avoid having to make excuses by pushing the sales of new stock products for which they are responsible before each sales meeting.
New product budgeting
Many firms have adopted a budget for new inventory items; a specific amount of money set aside for sales or marketing to invest in new products. This type of budget can put an end to the “head butting” common between sales and purchasing:
Salesperson: “I need you to bring in this item.”
Buyer: “I can’t bring in the item until you show me some orders for it.”
Salesperson: “I can’t show you the orders until it is on the shelf. And, in order to achieve our target gross margin, you had better bring in enough to get the 100 case price.”
If you implement a new item budget, whenever sales requests that a new item be stocked, a buyer can simply respond, “Sure, if you have the money in your
budget.” As soon as most of the initial shipment of a new product is sold or used (i.e., leaving an amount equal to demand during the anticipated lead time) it is
considered to be a normal stocked inventory item. The appropriate buyer will assume responsibility for reordering stock and the new item budget is replenished by the value of the initial stock purchase.
New item budgets also provide two other benefits:
- Because of the limited funds available, sales will tend to buy small quantities of a lot of new items. The result is an effective test marketing program.
- There is substantial peer pressure among salespeople to sell new products. If one salesperson uses part of the new item budget for a product he wants to stock, he is tying up funds that could be utilized by another salesperson.
At a recent forecasting symposium we found that when a single person made decisions concerning the introduction of new products, more than 80 percent of the time the entire initial stock quantity would not be sold or used. That is, part of that shipment would become dead stock and have to be liquidated.
But when three or more people reviewed new product questionnaires and agreed to
introduce a new product, the possibility that part of the initial shipment would result in dead stock dropped to less than 15 percent.
It’s time to replace emotion with analysis in making decisions concerning new products.. CS
Jon Schreibfeder is president of Effective Inventory Management, Inc. He has authored numerous articles and several books on inventory management best practices and is the designated inventory management consultant for STAFDA. Jon can be reached at 972-304-3325 or by e-mail at email@example.com