Some months ago, I discussed some bad advice that was being promoted by some industry experts. Your response was overwhelming. Many of you described other situations in which you did not receive realistic solutions to your problems. But sometimes even bad advice can get us thinking. And the process of thinking can result in good solutions. Whenever I read any business article I always ask:
• Does this subject apply to our situation?
• Does it adequately address the issues that my company faces?
• Can the proposed solution be implemented with reasonable effort and cost?
This week another newsletter arrived in my mailbox, and the lead article stated that you should be concerned with dead inventory. The writer suggests that you should receive a monthly report of items that have had no sales in the past 12 months. He advocates that the inventory of these products should be liquidated.
Just think about this…..
Does liquidating all inventory with no sales in the past 12 months address all of your troublesome stock issues and is it appropriate? What if you sold two pieces of a product in the past 12 months, but you had 250 pieces in stock? While the item isn’t dead, you have a 125 year supply in inventory (i.e., 250 pieces ÷ 2 pieces per year). Shouldn’t you be concerned with this item as well? And, what about critical repair items? These items, must be kept on hand in case they are needed, but perhaps you didn’t need one in the past 12 months.
We suggest that you examine all possible unwanted inventory at the end of every month in a Possible Unwanted Inventory Report. This will include:
Excess Inventory – any portion of your on-hand quantity in excess of anticipated demand over the upcoming “x” months. Most organizations can consider anticipated usage in the upcoming 12 months in this analysis. However, due to the risk of expiration and obsolescence, some industries (e.g., food and electronics) often use anticipated usage in fewer upcoming months in defining excess inventory (items with no usage in the past 12 months).
Non Moving Inventory Stocked for a Specific Customer – It is expensive to stock a product for a specific customer. Best practice is to include customer specific inventory that has had no usage, or usage substantially below the customer’s forecast, during the past 60 days on your monthly Possible Unwanted Inventory listing. Contact the customer to determine why he or she is not purchasing the product as promised.
“Stocked” Non Stocked Items – Non stock products should only be ordered to fill an existing customer order. No quantity of these items should remain in your warehouse after that customer order has been filled.
Products with a Short Shelf Life – These are pieces of products with an expiration date that falls within the next several weeks. Do you want to notify warehouse personnel to be sure that these pieces are picked first to fill customer orders?
We suggest you revisit and re-evaluate reasons you have for keeping some non-moving inventory, such as critical repair items discussed earlier, every 6 months.
So, we just didn’t accept the advice to liquidate all inventory with no sales in the past 12 months…we thought about it and evaluated the appropriateness of it.
Identifying unwanted inventory on a regular basis will help ensure that you have money and space available to “meet or exceed your customers’ expectations of product availability”…..the goal of effective inventory management!
P.S. – The newsletter writer also stated that your cost of carrying inventory is between 25% and 29% per year (with no justification). This means that it costs somewhere between 25 and 29 cents to maintain a dollar’s worth of inventory for an entire year. This is far too high for most organizations in the year 2014. Use the questionnaire in the Resources section of our web site, www.EffectiveInventory.com, to determine your actual cost of carrying inventory.