Minimizing the Negative Effects of a Forced Inventory Reduction
By Jon and Matt Schreibfeder
When there is a downturn in sales, or your organization faces unexpected expenses, management
often dictates a reduction in inventory. The challenge for the operations and procurement
departments is to accomplish this goal without increasing the number of stockouts and
disappointing customers. Over the next several months we will discuss ways in which to reduce
inventory that will have little or no effect on customer service.
It is important that management provides the operations and procurement departments
with specific goals involving inventory reduction. How much does inventory need to be
reduced? By what date? Without goals, and tools in place to monitor your progress in achieving
these objectives, it is difficult to know the size of this task and successfully reduce your
inventory investment. Set monthly and ultimate goals. Look for continual improvement. If you
fail to meet a monthly goal, try to determine the reason, and determine what you must do to get
back on track:
- First, identify surplus inventory. Surplus inventory is any portion of the available
quantity (On-Hand – Committed on Current Customer Orders) of an item in excess of the
maximum stock quantity. Be sure no one buys any more of any of these products until its
net available quantity (On-Hand – Committed on Current Customer Orders + On
Replenishment Order) falls below its minimum stock quantity, also known as a reorder
point. - Second, sort a listing of products with surplus inventory in each warehouse by
months with usage and surplus inventory value (both in descending order). Start
with the items that sold in all 12 of the past 12 months with the highest value of surplus
inventory. It should be possible to sell off unwanted quantities of these items in the
warehouse in which the inventory is located or another company location. Repeat this
process with products that sold in 11, 10, nine and eight of the past 12 months. Consider
developing sales incentives and promotions to liquidate some of this inventory and
generate some needed cash for your organization. - Third, differentiate between saleable inventory and junk. In most cases it is much
harder to liquidate unwanted quantities of items that aren’t sold or used on a regular
basis. But it can be done:
Saleable inventory is in good condition and can be used by someone; maybe someone outside of your organization. Often this includes leftover quantities of non-stock or special-order items. There are internet sites that will list your unwanted stock. Search with the words “Surplus” and “Inventory” followed by the item’s product line or manufacturer. But as you list these items, be realistic with your price tags. Understand that inventory is not worth what you paid for it. It is worth what someone is willing to pay you for it.
Junk is material that is broken, obsolete, expired or is of little use for some other reason. Don’t waste your time listing your junk on the internet. You might be able to sell this junk “in bulk” and receive scrap value. Again, this is generating some cash and freeing up space in your warehouse.
But selling off your surplus stock may be too slow a process to achieve your goals within a reasonable amount of time. Let’s look at an additional way to reduce inventory:
- Fourth, identify your slow-moving products. These might be items that sold in three or
fewer of the past 12 months. Again, sort them in descending order based on inventory
value. Does each of these products need to remain a stocked product in this location?
Can stock be maintained in a central warehouse and transferred as needed or shipped
directly to a customer? You probably will find that some slow-moving items are different
brands of other more popular stocked items. Can you convince your customers to buy or
use the more popular brand of the product?
Follow these steps and you will be on the way to successfully reducing the value of your
inventory. Next month we will continue our discussion by examining ways to adjust the
replenishment parameters in your ERP system to meet or exceed your customers’ expectations of
product availability with the amount of each item that will minimize your investment in
inventory.