It’s Time to Balance Your Inventory
By Jon and Matt Schreibfeder
Unless you own a pet store, your inventory is not alive. It does not have feelings and won’t complain about working too hard. It is a sad fact that too many companies allow their inventory to become lazy. It sits on the shelf gathering dust rather than working to earn profits.
We’ve found that many of our new clients have too much inventory of some items in one location while the same product is in short supply in another warehouse. The process of moving surplus material to a location where it can be sold or used is called “inventory balancing”.
We suggest you initiate inventory balancing at the end of every month with an inquiry or report that lists “surplus stock” in each facility. Surplus stock is any quantity of a stocked product above the “Surplus Point”. The surplus point is defined as part of the current Available Quantity (i.e., Quantity On-Hand – Quantity Committed on Current Outgoing Orders) that is in excess of the Maximum Stock Quantity + One Vendor Package Quantity. In other articles, as well as the newly published Achieving Effective Inventory Management – 7th Edition, we discuss properly calculated maximum stock levels, as well as other replenishment parameters, for each stocked product. Consider this item as an example:
- Current On Hand Quantity – 120 pc.
- Committed on Current Outgoing Orders – 15 pc.
- Available Quantity – 105 pc.
- Maximum Stock Level – 40 pc.
- Cost per Piece – $15.50
- Vendor Package – 10 pc.
The Surplus Point is 50 pieces (Maximum Stock Level of 40 pieces + a Vendor Package of 10 pieces. The Surplus Quantity is 65 pieces (Available Quantity of 105 pieces less the Surplus Point of 50 pieces). At a cost of $15.50 per piece, this Surplus Quantity is worth $1,007.50. Because many organizations stock thousands or even tens of thousands of products, they may have a substantial amount of money invested in surplus stock.
Could this surplus material be better used in other company locations? If it is practical to transfer the material, buyers should be told to transfer surplus quantities of the product to a location that needs to replenish its inventory before buying more from a vendor. What if the surplus material isn’t needed by another location and won’t be needed by any other of your stores or warehouses or other facilities within the upcoming 12 months? Or is it not practical to move surplus stock?
Liquidate it! Get as much money as you can for this unwanted stock. Consider these options:
- Try lowering the price.
- Substitute the product for a more expensive similar product (if the customer agrees).
- Offer the material for sale through an on-line auction or liquidation site.
- Donate the material to a charitable organization (you may be able to use the deduction to increase overall profitability).
Remember that inventory you own is a “sunk expense”. It is not worth what you paid for it. It is worth what your customers are willing to pay for it. Unless you are selling fine wines or antiques, it will not appreciate with age. The sooner you realize it is not needed, the better chance you have of successfully disposing of it.
Many of our new clients have a substantial amount of surplus inventory. It is interesting to investigate how it accumulated. Occasionally, it is a product that suddenly loses favor in the marketplace. Customers stop buying it without any warning. In this case surplus material cannot be avoided. But more often it is caused by poor purchasing and stocking decisions:
- A large quantity of a new product is acquired without your sales or marketing teams performing adequate research as to whether your customers want to buy it.
- A branch manager insists on keeping a certain quantity of a product available for immediate delivery “just in case” someone needs it.
- Because profitability is based on gross margins [i.e., (Sales $ – Cost of Goods Sold $) ÷ Sales $], your buyers may be tempted to buy a large quantity to minimize the unit cost you pay for the product. The excess inventory you accumulate as a result does not affect your profitability measurement.
Best practice organizations establish policies and procedures that will lead to achieving the goal of effective inventory management (EIM). That is to “meet or exceed customers’ expectations of product availability while maximizing net profits.” Inventory balancing will help clean up for stocking mistakes that accumulated before the implementation of EIM. Performed on a regular basis, inventory balancing can also identify and deal with surplus stock that occurs during the normal course of business. Make a commitment today to get the “fat” out of your inventory and keep it in the best possible shape.
Do you have any questions about any aspect of inventory management, warehousing or logistics? Please contact us and we will set up a time to talk.
Matt Schreibfeder
matts@EffectiveInventory.com
Jon Schreibfeder
jons@EffectiveInventory.com
Announcing the Release of the EIM Spreadsheet Set Version 6.1 We are proud to announce the release of the EIM Spreadsheet Set Version 6.1. It is the perfect companion to the new Achieving Effective Inventory Management – 7th Edition. We have enhanced each of the 11 inventory-analysis spreadsheets with additional features, comprehensive graphs, and 44 pages of comprehensive documentation. Spreadsheets in the set include an updated version of our Forecasting/Analysis spreadsheet that allows you to perform a comprehensive analysis of up to 100 stock items at a time.
Other spreadsheets in the set include:
• Price Break by Item Spreadsheet
• Price Break by Vendor Line Spreadsheet
• Price Break with Freight Allowance and Terms Spreadsheet
• Rebate Analysis
• Value of Lost Material Spreadsheet
• Landed Cost Calculator
• Cost of Filling Order Calculator
• Carrying Cost and Replenishment Cost Calculator
• Replenishment Parameter Analysis
• Price Increase Analysis
In addition to more features, we’ve improved the user interface and present results in easy-to understand formats. It is a great tool for dealing with today’s supply chain challenges!