Excess inventory: 6 steps to cut your losses
Excess inventory can tie up a lot of capital and storage space. But dumping it can feel like you’re throwing money away, and that makes it a tough call. This makes it a decision that many owners put off.
However, a little planning can help you minimize your losses and prevent excess inventory in the first place. Here are six steps that could help with your planning.
1. Put someone in charge
Making someone responsible and accountable for inventory is an excellent way to improve its management. This person’s job can include monitoring inventory, providing input on ordering decisions and identifying slow-moving products.
2. Decide what’s excess inventory
Decide what you mean by excess inventory. Ask yourself what is the maximum time an item can sit on the shelf before action is needed. Your answer may be different for each item.
Take into consideration factors such as the amount of inventory you need to meet customer or production demand. You should also consider supplier lead times, storage costs, item shelf life and how quickly items become obsolete.
3. Set rules
Define how you will move the excess inventory. There are several possibilities:
- Create rules for what to do with excess inventory.
- Offer sales incentives to your representatives.
- Selling items to employees at a discount.
- Offer items to your employees or donate them to charity.
You can also ask if you can return the products. Some suppliers will agree even if you’re past the return window, especially if you’re willing to pay a restocking fee. It often makes more sense to pay a restocking fee than to keep inventory several years.
In the worst-case scenario, consider disposing of excess items instead of spending money storing them. A write-off can sometimes be cheaper than storing stock that has little prospect of being sold.
4. Identify excess items
Identify which products you have too much of in inventory. Take action first on the ones with the biggest gap between the amount in inventory and your actual needs.
5. Monitor your inventory
Good decisions start with good information. Be sure you have a good picture of your inventory with a system that records the quantities, location, acquisition date and reordering frequency of all items.
It’s easy to forget about aging inventory, until one day you realize that your warehouse is packed.
Proper monitoring helps you avoid the problem. Also, you should regularly check the accuracy of your records by doing a physical count of your inventory and comparing it to the numbers in your system.
6. Analyze the causes of the problem
Look into why you wound up with so much inventory in the first place.
- Is it because of production bottlenecks?
- Do you ever order buffer stock because of unreliable suppliers?
- Do you order too much because of poor inventory monitoring?
- Are your orders aligned with customer demand, sales forecasts and distribution capacity?
An analysis of the root causes of your problems could help you zero in on the right solutions. These can include smoothing out production or supplier problems, improving inventory monitoring or removing slow-moving items from your product line.
Learn to improve your inventory management
Discover how to set key performance indicators, ensure that you have the right amount of inventory, and improve your company’s cash flow by downloading our free guide for entrepreneurs: Inventory Management.