Disposing of Obsolete and Excess Inventory Could Be Your Most Profitable Sale

Restaurants and other food-related services businesses are probably better inventory control managers than many product companies, retailers, and manufacturers. When their inventory is going bad it smells, they have nowhere to bury it, and they have to get rid of it. Most restaurants sell out of product before they stop offering it, they do not change menus until after the inventory is sold, and if a lot is left over, it goes bad or the owner and chef go on a tuna casserole jag. Two weeks of tuna at every meal would be suitable punishment for any overzealous purchasing agent or salesperson.

Many manufacturers and product companies, on the other hand, have many variables affecting inventory, from outstanding raw materials commitments through sales channel liabilities. For now, we will address the finished goods-related inventory issues. Work in process (WIP) and raw materials inventory is best addressed in a different discussion that includes MRP (management resource planning) systems.

Before we get to the nuts and bolts (“Data is numbers and numbers have no emotion”), we have to address egos. Owners, salespeople, and entrepreneurs drink their own Kool-Aid. Many companies hold on to the hope—and hope is NOT a strategy—of selling overstocked products, obsolete products, and the complete sell-through of products in their sales channels at full price.

I can bring forth dozens of examples of companies and entrepreneurs that aggressively procured or manufactured products they were “just sure” would be successful, were grossly over-forecasted by their sales department, or did not all sell for any number of reasons. Some of these products were too technical for mass market, some required a sales investment that exceeded their null budget, and some did not work. There are thousands of reasons, excuses, and examples of finger-pointing to spread up and down the organizational charts.

I have seen companies hold on to bad excess inventory for years without disposal or write-off. It costs them investment opportunity, borrowing costs, storage costs, and management costs, and it makes their financials look bad.

Excess inventory in the sales channel

Setting emotional attachment aside, we need to first assess the total inventory liability and the ramifications of any changes to the total sales channel. Know what your inventory is, know where it is, and know its sales velocity and acceleration. Are you selling 100 per month with a 10% quarterly decline, 100 per month with a 5% quarterly increase, and are you selling without additional or exceptional incentives? How long will the channel inventory take to sell through at the current run rate?

You must take into account that anything in the channel that does not sell will likely come back, and repercussions could include freight costs, a disenchanted retailer/reseller due to lack of sales, and product damaged in the recall.

More articles from AllBusiness.com:

• Creating a Capital Equipment List
• Maximizing Depreciation for Your Taxes
• Maximize Your Efficiency by Automating Inventory
• 5 Simple Ways to Improve Your E-Commerce Accounting Practices
• 3 Things to Change in Your Sales Process This Year

Pricing reductions most likely would cause an immediate “price protection” liability through the sales channels. These reductions would pass through the distributor to the retailer and may take 30-60 days to get implemented. Is the product overpriced in relation to its competitors, perceived value, and time on the market?

If you currently desire to maintain the existing MSRP (manufacturer’s suggested retail price), then advertising; instant or mail-in rebates; in-store promotions; end caps; or other programs should be considered.

Get creative and get the product sold. Reduce your inventory, convert your receivables to cash, and increase your inventory turns—even at reduced margins or a loss.

In-house excess inventory

When you are selling inventory at a reduced price, you need to consider your sales channels. It is possible to sell product to certain types of retailers that have close-out operations without upsetting your primary resellers?

Are there opportunities to sell to new channels at reduced prices? For example, have you not sold to BigLots, Tuesday Morning, WOOT!, or other retailers of that type due to margin compression or concern over MSRP erosion? Onetime deals, which most retailers understand, could be a way to quickly convert your inventory to cash. (A special note about WOOT: The company sometimes sell refurbished product.)

Can you cost-effectively repackage the product under a different name and sell it to alternative channels?

Are there any bundle opportunities you could offer, with other products you have or a complimentary product from another vendor, which you could offer a sales promotion with?

The cost of not taking action

Cost of money

You are costing yourself money by holding on to the inventory. Assuming you are a typical business, your cost of cash/borrowing is probably at least 10-12% for secured loans and probably 15-18% for credit card—assuming you can even get a loan. A few factoring and asset-based lines (ABL) of credit deals I have worked on recently were in the 18-22% range.

Depreciating value of your inventory

Time, technology, and competitors march on. Your products are losing value, especially if they have a shelf life. Batteries lose charge, electronics become outdated, and inventory spoils for any number of reasons.

Some technology companies write down their slow-moving inventory 3-5% per quarter or more in anticipation of price reductions. The value will go down, so plan for it. Hiding the depreciating assets to avoid current charges to earnings will only compound the problem later.

Given the cost of capital and obsolescence, selling your excess and obsolete inventory quickly is likely one of your most profitable sales. The cost of not acting can be quite high.

Break the rules—pay your salesforce MORE for selling the obsolete inventory (yes, even if they contributed to the situation). “Sell what you have, not what you want.”

RELATED: How to Forecast Inventory Needs