Remember that inventory you buy is a “sunk” cost. You’ve paid for it. No matter what it’s worth now, your money’s still gone. Compare it to shares of stock you may purchase in a company. The securities have “paper” value but no real monetary value until they are sold and turned back into cash.
Dead stock is easy to identify. It is comprised of all of the items in inventory that have had no positive usage (i.e., sales, transfers, use in production, etc.) over the previous “x” months (most companies consider 12 months an appropriate time period. But, we suggest you also examine products that have only had usage in one, two or three of the past 12 months. For each of these products ask:
- Do customers realistically expect this item to be available for immediate delivery? Do your competitors keep this item on the shelf? Remember that while you want to have better service than your competitors, you probably cannot afford to have “perfect service”.
- Is this a critical item that must be on-hand in case of an emergency?
- Though it is slow moving, does it contribute to other profitable sales? If so, is the related product profitable enough to justify stocking this item?
- If the product is stocked for a particular customer, does the profit generated by the customer justify carrying this product?
If you cannot say “yes” to at least one of these questions you probably don’t need to have the item in stock.
While it does not produce the most desirable result (i.e. selling the stock for a profit), liquidating dead inventory usually generates some money, and it always frees up valuable storage space. Sure it’s painful. It hurts so much that some companies can’t bring themselves to do it. They are emotionally tied to their products. They may even believe in fairy tales, including the one about how, one day, some desperate customer will walk in and buy all of the dust-covered stuff in the warehouse. The occasional sale of a piece of dead inventory perpetuates many sales managers’ belief in this myth. But these infrequent sales cannot come close to economically justifying maintaining all of the products that should be removed.
In the movie Wall Street, Michael Douglas’ character, Gordon Gecko said, “Don’t get emotional about stock, it clouds your judgment.” He was referring to securities. The same advice applies to the material in your warehouse. Don’t get emotional about stocked inventory
The goal of inventory liquidation is to dispose of unwanted inventory at the best possible price or least possible expense. Next month, we will examine several ways to accomplish this task.