In the face of new types of competitors (e.g., Amazon
Business), distributors should stop the habitual practice of
liquidating slow moving and "dead" inventory into cash, and
instead try to develop a long term plan to cost-effectively
market the potentially profitable products. Distributors who
do not want to develop such a plan need to be aware that the
traditional definition of slow moving and dead stock
("velocity") is not accurate, and can result in discarding
products that are profitable and can make the
distributorship more appealing to customers.
 As
competitors like Google Shopping for Suppliers acquire more
customers that buy the faster moving commodity products,
price competition will reduce margins (even further) on
them. So slower moving products will have to account for
more gross margin dollars than now. (New, fee-based
value-added services could bring in more revenue, but
services is not the subject of this article).
Remember that most of the slow/no movers were initially
purchased because there was demand or someone thought there
would be demand. Some slow/no moving products are customers’
returns of "non-returnable" items, and some resulted from
high minimum purchase quantities. Even if there were no new
competition, some of today’s fast movers will be tomorrow’s
slow movers, which is why a long term plan is needed.
Movement vs. Profitability Traditionally, some
distributors have been making decisions to liquidate
inventory based on movement or "velocity", which is not a
strategic measure. The prevalent measure of movement is
sometimes termed the ABC classification, and involves
identifying those stock products that account for the top X%
of cost of goods sold – COGS -- ("A" items), then the next
X% ("B" items), etc. The value of X is user-set and usually
set at 20. Often, under the ABC method, at least 60% of
stocked products are considered "slow", and 20% are
considered "dead" (especially products that were sold to one
customer that no longer buys them). Two other methods of
classifying product movement use "hits" (number of times
sold) or "units" (number of pieces sold) in a period,
instead of COGS.
Story
continues below ↓
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None of these
measurements reflect the gross or net profitability
of a product, measures that some distributors do use for
decisions about liquidating.
Gross Margin %, which is computer-calculated, can reveal
that some very fast movers are not very profitable, while
some slow pokes are more than earning their keep. Net
profitability can be defined as the dollar gross margin
of a product less the cost of servicing that product, and is
calculated by only some ERP
systems. But, there is much debate amongst distributors
about what constitutes cost of service, and even where there
is agreement, it is difficult to measure some of the costs
(e.g., extra cost of handling large or heavy items or
containers of items.
Even gross and net profitability are not the measure that
some distributors use when deciding which products to stop
stocking – Gross Margin Return on Inventory-Investment (GMROI).
It is a strategic measure, and is computer-calculated by
dividing a product’s dollar gross margin during a period by
the average value of its inventory during that period. (GMROI
can be compared to the return on other investments made by
the distributorship, such as the purchase of a fork lift.)
As with profitability, a GMROI analysis can show that some
slow movers are worth keeping, and some fast movers are not.
Some distributors argue that financially slow movers should
be kept because they are needed to offer a "full line" to
customers – but be careful of the slippery slope of "full
line", which can result in far too many financially-low
products being stocked for far too long.
Developing A Long Range Plan Here is an outline of
some things to consider while developing a long range plan
to market the financially slow moving and dead products.
• Decide what the minimum acceptable GMROI for stocked
products should be, and what the minimum $ margin/unit
should be.
• Calculate the GMROI for every product stocked, and
identify those that have not been earning enough return; for
those products that also have had insufficient $
margin/unit, and for which a price increase would not be
substantially helpful, start liquidating. (Watch out for
historical data with abnormalities in it, because it can
make winners look like losers).
• Examine the history of prior sales of these products that
will not be liquidated for clues about who might buy them
now.
• Determine if there are new types of customers who could
buy them.
• Consider increasing the price of each laggard.
• Be aware of new types of competition and what they are
selling or likely to sell.
• Investigate advertising, which might be cost-effective for
families of similar slow moving products).
• Use the company’s web site to promote them, and enable
registered viewers to browse through data for them, and
place orders.
• If it is necessary to establish relationships with other
types of distributors to sell them, investigate such
arrangements.
• Where applicable, for each tactic, estimate: needed
investments, ongoing expenses and costs, revenues, risks and
intangible benefits. Perform a long-term cost-benefit
analysis.
• Identify those products under analysis for which
parameters might need to be changed (service level, safety
stock, EOQ, Min/Max).
Loosely
related to stocked slow movers are non-stock products that
have sold. Analyze their sales, and determine which should
be stocked, not because they would likely sell frequently,
but would likely sell with an acceptable GMROI; and appeal
to current and potential customers. Avoid commodities. Also
consider non-stocks that have not been sold but are in the
same family as the non-stocks that have sold and would be
stocked.
Marketing the slow moving and dead products may work so well
that the quantity stocked would be increased.
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Dick Friedman, the author, is a recognized expert on
inventory management strategy and tactics for distributors
and wholesalers. Based on more than 30 years of experience,
he has developed strategies for competing against new types
of distributors; and developed unique management methods
that increase inventory profitability and customer service.
Dick is a Certified Management Consultant and is objective
and unbiased, so he does NOT SELL software or technologies.
Call 847 256-1410 for a FREE consultation, or visit his Web
Site http://www.genbuscon.com/ for more information or to
send e-mail.
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