Inventory Management with COVID-19, Part 9
Develop Your Approved Stock List
Remember that the goal of effective inventory management is “to meet or exceed customers’ expectations of product availability with the amount of each item that will either maximize your organization’s profitability or minimize your total inventory investment.” When you develop an approved stock list, you are making a commitment to have that product available in reasonable quantities for immediate delivery or shipment to customers. It takes some time and energy to get it done, but it is necessary to address it.
Stocking products is necessary to meet or achieve customers’ expectations. However, a company often 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. 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.
One process to separate your stock from your stuff is as follows:
1. Obtain a listing of all products that customers infrequently purchased (maybe three or fewer times during the past 12 months). If your computer system doesn’t keep track of products requests, look at items without much usage history (e.g., sales in fewer than three of the past 12 months).
2. Sort the selected 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.
3. For each item ask your salespeople the following four questions:
a. Do customers realistically expect that this item will be available for immediate delivery? Do your competitors always have this item in stock? Remember that you want to have better product availability than your competitors. However, you probably can’t afford to have “perfect service.”
b. 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.
c. Does the extraordinarily high profit derived from occasional sale of this item justify carrying the item in inventory for an extended period of time?
d. Is it impossible to convince your 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.
4. The inventory of each item that can get a “no” to at least one of the above questions should be reclassified as “stuff” and placed in a “to be liquidated pile.” During the liquidation process, you should be interested in getting as much money for this material as possible (see articles on our web site on liquidating unwanted stock for some ideas). Please 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 and maintaining your approved stock list is an important and necessary step in achieving effective inventory management in these challenging times. In the next newsletter, we will look at how to prevent “stuff” from entering your warehouse by implementing proper product introduction procedures. In the meantime, let us know if you have any questions. Stay safe!