Last month we discussed the first step in the 12-Step Program to Achieve Effective Inventory Management, ensuring that all material movement is properly recorded. Now we are ready to move onto step #2, developing an approved stock list for each of your stores or warehouses.
When you stock a product you are making a commitment to have that product available in reasonable quantities for immediate delivery or shipment to customers. But often a company has inventory in its warehouse that customers do not expect to be available for immediate delivery. In fact, they may not want it at all! We refer to this unwanted material as “stuff.” There are many reasons for “stuff” to accumulate, including:
- Left-over quantities of special order (i.e., non-stock) items. For example, a customer wanted four pieces of a special order item but you had to order 12, so eight pieces are left over and stashed somewhere in your warehouse.
- Customer cancellations of special-order items.
- A customer might stop buying products stocked specifically for them.
- Left-over quantities of discontinued or obsolete products.
- “Drops” or cut pieces of existing stock products that are too small to be sold or transformed into other inventory items.
It is imperative that you separate your good “stock” material from this stuff. This will allow you to make better use of the space used to store these items. And the money you could get by selling these products (even at scrap or liquidation prices) could be used to buy inventory that your customers really want you to have available for immediate delivery.
It is easy to separate your stock from your stuff.
- First, obtain a listing of all products that customers requested three or fewer times during the past 12 months (if your computer system doesn’t keep track of product requests, look at items with sales in three or fewer of the past 12 months).
- Next, sort these products in descending order based on the current inventory value (i.e., current on-hand quantity multiplied by the unit cost). Why do we sort these items by value? Because we want to look at the questionable item that has the most impact on our inventory investment first. You’re probably more concerned with a slow-moving product with over $1,000 in inventory than one with only a few dollars or cents.
For each item ask:
- Do customers realistically expect that this item will be available for immediate delivery? Could they get this product from a competitor out of that company’s stock inventory? Remember that you want to have better product availability than your competitors. However you probably can’t afford to have “perfect service.”
- Is it necessary to stock this product in order to generate other profitable sales? For example, a firm may have to carry a selection of repair parts for a large very profitable piece of equipment.
- Does the extraordinarily high profit derived from occasional sale of this item justify carrying the item in inventory for an extended period of time?
- Could we convince our customers to use a similar more popular item that we also stock? You have enough competition outside of your organization without having two products within your warehouse compete for the same sale.
For each item, if you can’t answer “yes” to at least one of these questions, reclassify the item as “stuff” and place your inventory of the product in a “to be liquidated pile.” During the liquidation process we are interested in getting as much money for this material as possible (see articles on our website on liquidating unwanted stock for some ideas). However, don’t get emotional about your stuff and decide to hold onto it because it is like a good friend or security blanket. Inventory does not have feelings! Anything you can get for this stuff above the cost of disposing of it should be considered “found money.”
Developing your approved stock list is an important and necessary step in achieving effective inventory management. Once you have completed this process you will be ready to start setting meaningful replenishment parameters for the items that are included on your approved stock list. We will move onto this topic next month.