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Excess Inventory

It Can Hurt Your Company's Bottom Line More Than You Realize! Part II

In the October issue of Repertoire, we discussed the definition and identification of excess inventory. Essentially, you need good data and an IT person who can turn your definition into a meaningful report. Once you have this information, you can determine how big a problem excess inventory is in your company, and then set your disposition objectives accordingly.

Know Your Surplus Inventory

Any good excess inventory program should include four parts: definition and identification (addressed last issue); plan and objectives; product disposition; and, finally, consistent attention for prevention. The last point, prevention, is probably the most critical. The real key to any good excess inventory program is being proactive and consistently monitoring your inventory prior to it reaching an excessive level.

Plan and Objectives

How much excess is acceptable? Who is responsible for dealing with it? Who will help coordinate the branches and the return process? How will you meet the excess reduction goals? This is where I get on my soapbox and discuss the importance of setting excess reduction goals. If your company wanted to increase sales by $5 million next year, would you just look at the P&L at the end of the year and hope it was there? No, of course not. Your company would create a budget, breaking the goal down into smaller objectives with specific time frames – monthly, weekly and even daily. You would make sure that everyone involved would know their part and what’s expected of them to meet the goal. You would review the plan regularly and adjust accordingly to be sure your sales force stayed on track. In short, your company would develop a plan, set objectives and monitor results.

But when it comes to excess inventory, many companies do not use this approach. If your company had $5 million in excess that it wanted to dispose of over the next 12 months, you would need to break it down into more manageable amounts and timeframes. This would work out to a monthly goal of $417,000. Each month you would monitor your progress toward your goal and adjust your action plan accordingly. This isn’t difficult stuff, it’s just a reasonable way to approach the problem and get the desired results. If your company waits until the twelfth month, as many do, you aren’t going to be happy with the outcome.

Product Disposition

What can we do with it? Remember that we’re talking about the “external” or “long-term” excess, over “X” months/days supply on hand. The steps are something like this:

1. Stock Balancing: Transfer between branches after receiving branch approval.
2. Sell Above Cost: Sell to the customer you bought it for or another at a discount, or maybe another distributor.
3. At Cost: Sell at cost, return at cost with no charges (freight, restock).
4. Below Cost: Sell below cost, return below cost with charges, liquidation house, garage/fire sales, flea markets, Internet.
5. Dump at “Write-off” Cost: Donate, scrap or dump.

Often, I’m asked at what point someone should dispose of excess inventory. Basically, that’s when you’ve accumulated “X” months/supply on hand that you’ve agreed is too much. Of course, some common sense needs to come into the picture, but if you have been through your disposition steps, it’s time to let go. When you take the tough step of selling below your cost, don’t stop there. It’s still excess inventory and it’s still hurting your bottom line and your customer service. Continue to work the plan, make the hard decision and scrap the crap!

Back to Part I

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