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 all tuna, all the time, would be suitable punishment for any overzealous purchasing agent or sales person.
Many manufacturers and product companies on the other hand have many variables effecting inventory from outstanding raw materials commitments through Sales Channel Liabilities. For now we can address the finished goods related inventory issues. Work in Process (WIP) and Raw Materials inventory is best addressed in a discussion which includes MRP (Management Resource Planning) systems.
Before we get to the nuts and the bolts, “data is numbers and numbers have no emotion”, we have to address egos. Owners, sales people, 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 finger pointing to spread around and down the organizational charts.
I have seen companies hold on to bad 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.
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 your inventory, 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 most likely will come back and repercussions may apply including; freight costs, a disenchanted retailer/reseller due to lack of sales, and product damaged in the recall of the product. An example Flow Chart is available here.
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); Advertising, Instant or Mail in Rebates, In Store Promotions, End Caps or other programs could 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.
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 which have close-out operations without upsetting your primary resellers?
Are there opportunities to sell to new channels at reduced at price, 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? One time deals, which most retailers understand, could be a way to quickly convert your inventory to cash. (A special note about WOOT!, they sometimes sell refurbished product! )
Can you repackage the product under a different name cost effectively 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 Acting
The Cost of Money
You are costing yourself money by holding 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 cards – if you can even get or keep a loan during the current banking crisis. In fact, a few Factoring and Asset Based Lines (ABL) of Credit deals I have worked on recently were in the 18 – 22% range!
For recent articles on AllBusiness.com covering Factoring see here;
The 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, the 2008 version of your software becomes pass?, 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, plan for it. Hiding the depreciating assets to avoid current charges to earnings will only compound the problem later.
I made a quick and dirty spreadsheet with variables to demonstrate the costs at Finished Goods. You can see an example, or download the spreadsheet for your own use here.
As you can see, with the cost of capital and obsolescence, selling your excess and obsolete inventory quickly is more than likely one of your most profitable sales. The cost of not acting is huge, especially considering the current economic outlook.
Break the rules; pay your sales force MORE for selling the obsolete inventory. Yes, even if they contributed to the situation – “sell what you have, not what you want”.
“Choose your early resellers carefully; they could be your last.”
“Using contract call centers for lead generation, sales, customer service and support, and disaster planning.”
“Small product and packaging changes can open new market opportunities with little additional cost.”