Dick Friedman: Dead Inventory
Don't Liquidate It!
In the face of new types of competitors (e.g., Amazon Business), specialty tool and fastener distributors should stop the habitual practice of liquidating slow moving and “dead” inventory into cash. Instead, try to develop a long term plan to cost-effectively market the potentially profitable products.
Distributors who do not want to develop such a plan need to be aware that the traditional definition of slow moving and dead stock (“velocity”) is not accurate, and can result in discarding products that are profitable and can make the distributorship more appealing to customers.
As new competitors like acquire more customers that buy the faster moving commodity products — yes, there are some even in the specialty world — price competition will reduce margins on them. So slower moving products will have to account for more gross margin dollars than now. (New, fee-based, value-added services could bring in more revenue, but services is not the subject of this article).
Remember that most of the slow/no movers were initially purchased because there was demand or someone thought there would be demand. Some slow/no moving products are customers’ returns of “non-returnable” items, and some resulted from high minimum purchase quantities. Even if there were no new competition, some of today’s fast movers will be tomorrow’s slow movers, which is why a long term plan is needed.
Movement vs. Profitability
Traditionally, some distributors have been making decisions to liquidate inventory based on movement or “velocity”, which is not a strategic measure. The
prevalent measure of movement is sometimes termed the ABC classification, and involves identifying those stock products that account for the top X percent of
cost of goods sold — COGS — (“A” items), then the next X percent (“B” items), etc. The value of X is user-set and usually set at 20.
Often, under the ABC method, at least 60 percent of stocked products are considered “slow”, and 20 percent are considered “dead” (especially products that were sold to one customer that no longer buys them).
Two other methods of classifying product movement use “hits” (number of times sold) or “units” (number of pieces sold) in a period, instead of COGS.
None of these measurements reflect the gross or net profitability of a product, measures that some distributors do use for decisions about liquidating. Gross Margin percent, which is computer-calculated, can reveal that some very fast movers are not very profitable, while some slow pokes are more than earning their keep.
Net profitability can be defined as the dollar gross margin of a product less the cost of servicing that product, and is calculated by only some ERP systems. But, there is much debate amongst specialty tool and fastener distributors about what constitutes cost of service, and even where there is agreement, it is difficult to measure some of the costs (e.g., extra cost of handling gasoline-powered air compressor).
Even gross and net profitability are not the measure that some distributors use when deciding which products to stop stocking; they use Gross Margin Return on Inventory-Investment (GMROI). It is a strategic measure, and is computer-calculated by dividing a product’s dollar gross margin during a period by the average value of its inventory during that period. (GMROI can be compared to the return on other investments made by the distributorship, such as the purchase of a delivery truck.)
As with profitability, a GMROI analysis can show that some slow movers are worth keeping, and some fast movers are not. Some distributors argue that financially slow movers should be kept because they are needed to offer a “full line” to customers – but be careful of the slippery slope of “full line”, which can result in far too many financially-low products being stocked for far too long.
Developing A Long Range Plan
Here is an outline of some things to consider while developing a long range plan to market the financially slow moving and dead products.
- Decide what the minimum acceptable GMROI for stocked products should be, and what the minimum dollar margin/unit should be.
- Calculate the GMROI for every product stocked, and identify those that have not been earning enough return; for those products that also have had insufficient dollar margin/unit, and for which a price increase would not be substantially helpful, start liquidating. (Watch out for historical data with abnormalities in it, because it can make winners look like losers).
- Examine the history of prior sales of these products that will not be liquidated for clues about who might buy them now.
- Determine if there are new types of customers who could buy them.
- Consider increasing the price of each laggard.
- Be aware of new types of competition and what they are selling or likely to sell.
- Investigate advertising, which might be cost-effective for families of similar slow moving products).
- Use the company’s website to promote them, and enable registered viewers to browse through data for them, and place orders.
- If it is necessary to establish relationships with other types of distributors to sell them, investigate such arrangements.
- Where applicable, for each tactic, estimate: needed investments, ongoing expenses and costs, revenues, risks and intangible benefits. Perform a long-term cost-benefit analysis.
- Identify those products under analysis for which parameters might need to be changed (service level, safety stock, EOQ, Min/Max).
Loosely related to stocked slow movers are non-stock products that have sold. Analyze their sales, and determine which should be stocked, not because they would likely sell frequently, but would likely sell with an acceptable GMROI; and appeal to current and potential customers. Avoid commodities. Also consider non-stocks that have not been sold but are in the same family as the non-stocks that have sold and would be stocked.
Marketing the slow moving and dead products may work so well that the quantity stocked would be increased. CS
Dick Friedman is a recognized expert on warehouse operations, management and technologies for specialty tool and fastener distributors. He is a Certified Management Consultant and is objective and unbiased, so he does NOT SELL warehouse management systems or technologies. Dick uses a 120-point checklist to identify reasons for warehouse mistakes and potential mistakes, and then define improvements that prevent mistakes that can result in lost sales and customers — without getting technology. Call (847) 256-1410 for a FREE consultation, or visit www.GenBusCon.com for more information or e-mail dick@GenBusCon.com.
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