The best run businesses understand the daily costs of holding inventory. The best way to reduce these costs is to ensure that inventory is sold as often as possible. Now, I know this is easier said than done, but in a number of cases companies have the choice of liquidating their dead stock and instead choose not to. Why do they do this? In most cases, they hold onto their dead stock in the hopes of one day selling it for full value or for a large profit.
The longer they wait the more likely that inventory gets damaged or becomes so outdated and obsolete, that it becomes nearly impossible to sell. So, if it’s so important to sell and move inventory quickly, why do so many companies choose to hold dead stock in the hopes of one day cashing in? More importantly, why do companies make it so difficult for their sales force to sell dead stock?
A number of companies simply can’t let go of the paper cost of the dead stock. They allow the original purchase price of the inventory to compromise their decision to liquidate it. When they have the chance to sell it, they still try and generate a profit off the original purchase price.
The inventory could be several years old, and they’ll still think the original cost of the inventory applies. Dead stock is dead for a reason. It’s obsolete, outdated and antiquated. If customers still needed it, it wouldn’t be dead stock.
- Why not just wait? Time and again, companies simply choose to hold and wait. The longer they hold, the worse it gets. What they lack is a proper understanding of the daily cost of money, and its impact on inventory every day it isn’t sold.
- What is the daily cost of money? To understand the daily cost of money, assume the company takes a loan to finance the purchase of its inventory. The loan has a yearly interest rate that can be broken down into a daily interest rate. For example, let’s assume it’s 4% to finance the inventory. The company’s total dead stock is $500,000.00. The yearly interest rate would amount to $20,000.00 of interest. The daily interest would be that 4% divided by the 365 days in the year, which would be 0.000109% or $54.79 a day to support the dead stock inventory. While this is somewhat of a simple example, its basic premise is that every day the inventory is not sold, it costs the company approximately $54.79.
The likelihood that a company will be able to recoup the full value of the dead stock declines every day they choose not to liquidate it. There is a window of opportunity here. The moment stock becomes slow moving or outdated, it needs to be sold immediately. The faster the company sells it, the better its chances are of recouping the full value of the $500,000.00.
Unfortunately, a number of companies hold onto the inventory in the hopes of making a profit, and get further and further away from recouping the original amount. There is also another mistake made by companies, and it’s one that ultimately inhibits their sales department from making a difference.
To better understand the two main costs of managing a supply chain, please see: The Customer Demand & Inventory Gap: The Bell Curve
A Number of Companies Don’t Properly Empower Their Salespeople to Make Deals
Perhaps the biggest problem companies have with dead stock is their inability, or unwillingness, to empower their sales department to make the necessary deals to liquidate dead inventory. Instead, they handcuff them with needing to have the necessary approvals at various sell prices.
Empower your sales team to move dead stock: Sales people need to be empowered to make the deals to move dead stock when the opportunity presents itself. In addition, they must be rewarded for moving it. While it’s true that sales plays a role in excess inventory, they still must be both empowered to make those deals, and be rewarded for making them. When sales sell dead stock, they forego the opportunity to sell higher profit margin products. It also increases the time between re-order points for customers. Therefore, make sure to reward the sales people and empower them to make deals.
Don't hold back your sales team when selling dead stock
Sales people should never be in a position to tell a customer they need an approval to make a deal on dead stock. Customers want to speak with decision makers, not messengers. As a customer, nothing is worse than hearing that a sales professional has to wait for approval, especially when that approval takes too long!
Empowering your salespeople to make the necessary deals to move inventory, and compensating them for doing it, will help to alleviate the problem and costs of excess dead stock. The purpose is to be more cognizant of the daily cost of not selling the inventory. Take the time to calculate the daily cost of money when it comes to your company’s dead stock. This will provide that much needed motivation to sell the inventory when the opportunity presents itself.
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