Managing slow moving inventory is never easy. There’s the constant concern of the inventory becoming damaged or worse, ruined beyond repair. Companies must therefore be proactive in selling this inventory when the opportunity presents itself. In this regard, a number of companies become concerned with the impacts and costs of slow moving inventory on their bottom line. So, how does inventory become obsolete and what strategies can companies adopt to stop it from happening?
When thinking of slow moving inventory, think of the company’s financing costs to retain and hold inventory for extended periods. The longer it’s held, the higher the costs and the more likely the inventory will become obsolete. To quantify these costs, companies apply 3% to their inventory value every month. This 3% is made up of a number of cost drivers. These cost drivers do nothing more than increase the company’s costs to support its inventory. It’s simply a matter of time before the inventory becomes so outdated that no customer is willing to purchase it. At that point, the company will have to liquidate the inventory at a huge discounted price, or scrap it entirely. In order to get a greater appreciation for the impact of slow moving inventory, consider the following example.
The impact of slow moving inventory
A retail outlet has a specific time period with which to sell its seasonal product lines. For instance, if it doesn’t sell its summer clothing line during the summer months, it will have to reduce pricing during the fall season. If it fails to sell that inventory in the fall, it could be left with the inventory until the following summer. At that point, no amount of sales will recoup the company’s 3% monthly carrying costs. In essence, the product’s costs will be so high that no amount of revenue will be able to cover the losses. Therefore, there is a finite amount of time with which the company has to liquidate its inventory before it can no longer sell it. In other instances, a company may need to liquidate inventory due to shelf life. In this case, the product or material may have a longevity period where it can no longer be sold past a specific expiry date.
Possible solutions to slow moving inventory
There are a large number of causes of slow moving inventory. In some cases it’s caused by inaccurate sales forecasts. In other instances it’s due to production overrun or purchasing too much. Yet, sometimes it’s caused by poor inventory counting methods or inaccurate inventory counts. In a large number of cases it’s a combination of causes. This requires a multipronged approach to reducing the impact of slow moving inventory on the company’s carrying costs. Given the multitude of causes, what strategies can companies adopt to reduce the impact of slow moving inventory?
- Adopt inventory best practices: It’s important to understand that your company has several players who impact your inventory costs. Sales & procurement must work together to isolate problem product lines and adopt plans to stop them from becoming slow moving. It’s a good idea to have both sales & procurement review upcoming sales forecasts in order to account for any unforeseen spikes in demand.
- Use incentives & discounts to sell inventory: Incentivize your customers to purchase slow moving inventory before it becomes obsolete. Don’t be concerned about reduced gross profit. Instead, temper your concerns with the reality that the product’s gross profit has already declined by being held for so long. Ignore the sticker price and get that inventory moving!
- Get sales on board: It is one thing to incentivize customers to purchase product but it’s something else entirely to incentivize sales to sell it. Make sure your sales team is rewarded for their efforts to sell dead stock. Companies sometimes make the mistake of putting too much emphasis on the sales of their high inventory turnover rate products. Don’t make this mistake.
Companies must focus on reducing the impact of slow moving product on their inventory costs. Focus on customer reward programs and incentives that aim to liquidate inventory earlier in the process. Don’t be overly concerned about pricing but more concerned about your 3% carrying costs. The faster your company sells this inventory, the less impactful these carrying costs are on your bottom line.