In these current economic times, most companies are trying to find new ways to liquidate unneeded inventory. In the next two newsletters we are going to explore some effective ways to achieve this goal.
Remember that inventory you buy is a “sunk” cost. You’ve paid for it. No matter what it’s worth now, your money’s still gone. Compare it to shares of stock you may purchase in a company. The securities have “paper” value but no real monetary value until they are sold and turned back into cash.
Inventory slated for liquidation can be compared to shares of stock you own in a company headed for bankruptcy. When you first bought the stock, you thought it was a good investment. But market conditions, or other factors, changed the situation. The longer you hold onto the security the less it is worth. Selling the shares of stock for less money than you paid for them may be your best alternative. At least you’ll get some cash back from your investment.
While it does not produce the most desirable result, liquidating dead inventory sure beats losing all of your money. Sure it’s painful. It hurts so much that some companies can’t bring themselves to do it. They are emotionally tied to their products. They may even believe in fairy tales, including the one about how, one day, some desperate customer will walk in and buy all of the dust-covered stuff in the warehouse. The occasional sale of a piece of dead inventory perpetuates many sales managers’ belief in this myth. But these infrequent sales cannot come close to economically justifying maintaining all of the products that should be removed.
In the movie Wall Street, Michael Douglas’ character Gordon Gecko said, “Don’t get emotional about stock, it clouds your judgment.” He was referring to securities. The same advice applies to the material in your warehouse. Don’t get emotional about stocked inventory!!!
The goal of inventory liquidation is to dispose of unwanted inventory at the best possible price or least possible expense. Here are some ways to accomplish this task.
Transfer the excess stock to another company location where the inventory is needed. Why not have your buyers consider transferring any quantity over a location’s maximum quantity to another location where that inventory is needed? Why spend money to buy more of the product when you’ve already invested in inventory that is gathering dust at another company location? This option is particularly attractive if the cost of transporting the product between branches is a small fraction of the value of the item.
Many distributors have instituted ongoing programs to move slow-moving inventory to locations where it is in greater demand. This process is called “inventory balancing.” Lower-ranked products in one branch are candidates to be transferred to other branches where they are “A”- or “B”-ranked items. Multi-branch distributors practicing successful inventory management balance their inventory between warehouses at least four times a year.
Return material to the vendor. The actual desirability of this option varies with each vendor. Some vendors are very good about accepting returns. Others have associated charges and conditions such that returning the material is not a feasible option. Remember that the best time to negotiate the terms for the return of material with a vendor is before you agree to take on a new product line or place a very large purchase order.
Reduce the price to “move” the excess inventory. Department stores do it, why can’t you? This works especially well when the customer has some discretion as to which of several items she will purchase. For example, a customer might purchase a discontinued sink if the price is substantially lower than a similar item from normal stock.
Offer your salespeople a monetary incentive to sell the product. This works especially well when a customer can choose between several products that will meet his or her needs. Sometimes it is almost miraculous how fast inventory can move when salespeople are provided with the proper incentive.
Next month we will continue this discussion, exploring the possibility of liquidating stock over the Internet. In the meantime, get started getting liquidating any stock that does not help achieve the goal of effective inventory management – that is, to meet or exceed your customers’ expectations of product availability while maximizing your company’s net profits or minimizing your costs.