Are you tired of dealing with high inventory holding costs? Have you had enough of customers who promise orders, but rarely deliver? Are you concerned about retaining inventory for long periods and the high costs of inventory damage and inventory obsolescence? If so, then perhaps it’s time to start moving some of those under-performing product lines to made-to-order status only. Bottom line, your company must reduce your costs to hold and retain inventory.
Start first by liquidating your current inventory of dead stock. Next, put a proactive plan in motion to move these under-performing product lines to made-to-order business only. It’s not as difficult as it might seem, but it does involve a multipronged approach of reducing current inventory levels, managing customer expectations on lead times, and monitoring other product lines to ensure no additional inventory becomes slow moving.
1. Liquidating Current Inventory
One of the biggest issues I come across with my customers is their unwillingness to liquidate slow moving inventory, or better yet, their unwillingness to liquidate dead inventory. What they fail to realize is the impact of the daily cost of money. In essence, this cost of money is merely the company’s cost to finance their inventory.
The longer inventory is retained, the more expensive this daily cost of money and the more likely the inventory will become damaged or obsolete. If you’re wondering how much it costs to hold inventory for extended periods, take your product’s COGS (Cost of Goods Sold) and multiply it by your daily interest rates on business loans and credit lines. At some point those costs will surpass your company’s ability to derive any profit. It’s at that point where it no longer makes any sense to retain that inventory.
To read more about tracking inventory holding costs by product line, please refer to: Product Management: Determining Inventory Holding Costs By Product Line
2. Managing Customer Expectations on Lead Times
You may want these products to sell, but for whatever reason, they aren’t. Take the time to understand why, but until those questions are answered, it’s imperative to move these under-performing product lines to made-to-order status. This means all customers placing orders must be willing to deal with lead times on delivery. This reduces your inventory exposure, lowers the cost to finance that inventory, and empowers your salespeople to better manage customer expectations.
Reducing these inventory financing costs also improves the product line’s gross profit and provides the company ample opportunity to review its status. Granted, customers may be able to get faster delivery from your competition, but the fact that your company has been unable to sell this inventory means that something, somewhere, went wrong.
3. Monitoring Other Product Lines
Reducing the costs of inventory means to better understand why some product lines sell and others don’t. Make it a point to track your company’s other product lines. Are some of them on their way to becoming slow moving inventory? Are you aware of what product lines may become dead inventory in the future? To answer these questions, make it a point to track your product’s sales cycle times.
Understanding how and when your products sell, means to be aware of the cyclical and seasonal nature of customer order patterns. Monitor other product lines and track cycle times to make sure your company isn’t going to face this issue again.
Moving product lines to made-to-order status is a good decision when faced with under-performing product lines whose inventory holding costs are just too high. When faced with these situations, account for your company’s inventory costs by individual product line. Put plans in motion to reduce the impact of these costs by liquidating slow moving inventory. Next, properly manage customer expectations and explain the reasoning behind the product’s new lead time. Finally, monitor all product lines by tracking their individual sales cycle times, while looking for any signs that other product lines might become slow moving.
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