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.
Keeping the 80/20 rule in mind, your first priority is to address the few items with the largest volume of overstocks. This will have the most immediate financial impact on your business. Use all the marketing tools in your arsenal to promote these items immediately. Marking the items down in your peak season gives you the best opportunity to move overstocks quickly. Provide visibility in stores, online and in catalogs. Try a lower initial markdown — it acts as an order starter to drive top-line sales while minimizing future marketing expenses from recurring promotions on the same items.
There's no single solution for the other side of the 80/20 equation. They require routine discipline. Set a minimum monthly sales threshold per product, review product sales each month and be diligent about discontinuing items that don't meet the threshold. The cost of holding that inventory and waiting for consumers to find it and respond almost always outpaces the gross margin benefit of waiting to sell at full price. Retailers are using a variety of creative marketing approaches online to address these smaller inventory problems.
"Too much too soon" inventory presents an opportunity. This is good inventory — consumers love the product, but you simply own too much of it. Create one-time promotions to offer great products at temporary reduced prices. The gains in sales and corresponding reductions in inventory overhead typically make this strategy a win-win, benefitting both your financials and your customers.
Left unaddressed, nonproductive inventory can be a major financial drag on your business. But you can reduce its negative impact and even create some positive outcomes by following the simple guidelines laid out here. Good luck!
Joe is Vice President of Product Solutions at Software Paradigms International (SPI), an award-winning provider of technology solutions, including merchandise planning applications, mobile applications, eCommerce development and hosting and integration services, to retailers for more than 20 years.
Joe is a 34-year veteran of the retail industry with hands-on experience in marketing, merchandising, inventory management and business development at multichannel retail companies including Lands’ End, LifeSketch.com, Nordstrom.com and Duluth Trading Company. At SPI, Joe uses his experience to help customers and prospects understand how to improve sales and profits through applying industry best practices in merchandise planning and inventory management systems and processes.