Developing and Maintaining Your Approved Stock List
By Jon and Matt Schreibfeder
The goal of effective inventory management is to “meet or exceed customers’ expectations of product availability while maximizing your organization’s net profit or minimizing your total investment in stock inventory. This is the second in a series of articles to help you in developing a program to achieve this goal.
When you stock a product, you make a commitment, a commitment to have that product available in reasonable quantities for immediate delivery to your customers. That is, you have what they want, when they want it. Unfortunately, in all probability, not all of the inventory in your facilities is comprised of stocked products. You may have:
- Products that have expired or are obsolete or damaged.
- Items that your customers no longer want or are not needed within your organization.
- Leftover quantities of products that were “special ordered” for a specific customer.
- Remnant pieces of a stocked item that are too small to be sold or used.
This unneeded inventory takes up space and ties up funds that could be better used. But in many companies, it is ignored and accumulates. Best practice is to have policies and procedures in place that will ensure that you only have products that you want in your warehouse.
Review Slow Moving Items in Each Warehouse or Stocking Facility – Usually these are products that are not new (i.e., were not introduced within the past six months) that have had sales or usage in three or fewer of the past 12 months. Ask salespeople or technicians why each of these products needs to be stocked in that facility:
- Could they be special ordered for customers as needed?
- Could they be stocked in another of your facilities and transferred when required?
- Are they profitable or do they contribute to other profitable sales?
If you have a long list of slow-moving products, sort them in descending order based on the current value of available inventory. Available inventory is your current on-hand quantity less any amounts currently committed or allocated to current sales or production orders. This allows you to concentrate on the products that will have the most impact on your inventory investment. If a salesperson or technician insists that a slow-moving item remain on a location’s approved stock list, be sure to assign a date to review the product in the future.
Have a Formal Procedure for Introducing New Inventory Items – We’ve conducted research as to why new products “die” on our clients’ shelves. It is not surprising that if one person, on his or her own, makes the decision to buy a product “on a whim” remaining dead stock is often the result. To minimize the risk of dead stock, your company should require that a new product questionnaire be filled out whenever someone wants to introduce a new product, or an item that
requires an initial investment of more than “x” dollars (typical value is $50). The questions that need to be answered include:
- Who is going to buy the product? What customer or type of customer will find this product attractive? If the product appeals to your current customer base you have less risk stocking the item than if you are going to use the product to try to penetrate a new market.
- Why are they going to buy the product from us? If they will buy the new product from your company because you can offer it at a lower cost, you should raise a cautionary flag. What is the possibility that a competitor could undercut your price? If you are offering the product as a service to your existing customers or to compliment what you already sell, you have less risk of ending up with dead stock.
- What are estimates of sales or usage for each of the first six months after the product is introduced? How much thought and effort was exerted in developing these forecasts? How accurate has this source of information been in previous forecasts? Note that “best practices” for new products includes comparing actual sales to these estimates at the end of each month.
- How will introducing this item affect the sales or use of existing products? If a new product will take half the sales away from a currently stocked item be sure to tell your buyers to reduce their purchases of the existing product. Also ask your sales staff whether it is absolutely necessary to stock both items. You face enough competition in the marketplace without having two of your stocked items compete for the same sale!
- Can we test market the item? It is unusually dangerous to buy a large quantity of a new item (despite any large discount offered by the vendor) before seeing whether it will be accepted and purchased by your customers. Can you bring in a small quantity or stock in one warehouse or branch and “see if it will fly”?
- Do you have adequate room to store the new item? Warehouse and store walls are not elastic. Be sure you know you have space to stock a new item before you commit to buy it!
- If the item doesn’t sell, how easily can we liquidate the remaining stock? Can you return any unsold portion of the initial purchase quantity after it has been in your warehouse for six months? Can you liquidate this left-over inventory and at least recover your cost of the material? If not, perhaps you should think twice about ordering a larger quantity that you feel can be sold in a very short period of time.
Have a committee of sales, purchasing and operations management review the answers to these questions. We have found that if three or more committee members agree that it is a good idea to add the new item onto your approved stock list, your chance of ending up with “D.O.A.” (i.e., dead on arrival) inventory is very small.
Order Only Enough of Special-Order Items to Fill an Existing Customer Order – If a customer needs a product that is not on your approved stock list only order enough of the item to fill the quantity ordered. That may mean that the customer will have to buy more than they want or need. If they won’t take delivery of the extra material, consider:
- Setting the sales price based on the entire quantity you must purchase.
- Charging the cost of the extra material to the customer order. This will probably result in an unprofitable sale. One where your salesperson will not earn a commission. This may encourage your salesperson to persuade the customer to buy the entire amount you must purchase or utilize another product that is on your approved stock list.
Ensure Stock Rotation of Products with an Expiration Date. Be sure that new receipts are put away behind existing stock and that the oldest stock is used to fill orders. If you have trouble with this process, consider:
- Using the “lot control” function of your ERP system. Specify the quantities from specific lots that should be used to fill each sales or work order.
- Affix color coded labels printed with the expiration date to each received container of each product. Use 12 colors of labels, one for each month of the year. This will allow your order pickers to easily identify the oldest stock.
Have a Definition of a “Usable” Piece of Each Product That You Cut – Many companies that will sell cut pieces of pipe, tubing, wood or other products find that they have many small pieces of some items in stock. Pieces too small to be sold or used. Best practice is to have procedures for managing remnant inventory:
Have a Definition of a “Usable” Piece of Each Product That You Cut – Many companies that will sell cut pieces of pipe, tubing, wood or other products find that they have many small pieces of some items in stock. Pieces too small to be sold or used. Best practice is to have procedures for managing remnant inventory:
- Have a definition of the shortest/smallest “usable” piece of each product that can be cut. Pieces smaller than the defined usable piece size will be scrapped and adjusted out of inventory.
- Insist that warehouse personnel cut pieces required to fill orders from the smallest possible remnant piece. Only if there is no available remnant piece to fill a customer order can they cut a full piece or length.
Remember that the inventory you buy is meant to be sold or used. Most of you are not selling fine wine or antiques. Your inventory will not appreciate with age. Don’t allow non-performing inventory to remain in your warehouse to collect dust! If you need help or advice in this process, please let us know.