How to Manage Nonproductive Inventory, Part 2

In part one of this blog post, I discussed the three primary groups of nonproductive inventory that can have a huge negative impact on your gross margin and profits:

• Large overstocks on a relative few items: Remember, overstocks can be defined as excess inventory on discontinued or soon-to-be-discontinued items. These are the 10 percent to 20 percent of items that account for 80 percent or more of your overstocks.
• Small overstocks on many items: The other side of the 80/20 rule.
• Too much too soon: "Good" inventory on active items for which you have too many weeks of supply on hand.

Sound familiar? Well, take note. There are specific tactics you can employ to manage nonproductive inventory.

The first remedy is to simply avoid accumulating nonproductive inventory by improving your demand forecasting. Recognize that the quality of your inventory reflects the quality of your forecasts. Make sure you have good source data for planning. Apply both top-down and bottom-up planning. Your top-downs will be more accurate overall, while your bottom-ups will pinpoint your above average and below average items. Factor in all known marketing events.

Next, refine your demand forecasts and inventory material requirements planning (MRP) projections at least weekly. Doing so will ensure that all decisions are made using current information.

Finally, use "On Order Overstocks" exception reports from your MRP system. As your forecasts change, you'll eliminate the need for some of the inventory you've ordered that hasn't yet arrived. Your last and best chance to avoid stockpiling nonproductive inventory is to cancel all or part of that purchase order prior to delivery.

You've made your best forecast and taken steps to reduce incoming overstocks. What do you do with the nonproductive inventory that's already in-house? Some companies liquidate through third-party jobbers. While that's expedient, you'll typically get a better return by managing your own liquidations.